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Liquidity and Trading Dynamics

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  • Veronica Guerrieri
  • Guido Lorenzoni

Abstract

In this paper, we build a model where the presence of liquidity constraints tends to magnify the economy's response to aggregate shocks. We consider a decentralized model of trade, where agents may use money or credit to buy goods. When agents do not have access to credit and the real value of money balances is low, agents are more likely to be liquidity constrained. This makes them more concerned about their short-term earning prospects when making their consumption decisions and about their short-term spending opportunities when making their production decisions. This generates a coordination element in spending and production which leads to greater aggregate volatility and greater comovement across producers. Copyright 2009 The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 77 (2009)
Issue (Month): 6 (November)
Pages: 1751-1790

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Handle: RePEc:ecm:emetrp:v:77:y:2009:i:6:p:1751-1790

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References

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  1. Nobuhiro Kiyotaki & John Moore, 2012. "Liquidity, Business Cycles, and Monetary Policy," NBER Working Papers 17934, National Bureau of Economic Research, Inc.
  2. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
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  6. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  7. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  8. P. A. Diamond, 1982. "Money in Search Equilibrium," Working papers 297, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Francis A. Longstaff, 2002. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices," NBER Working Papers 9312, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  2. Rocheteau, Guillaume & Wright, Randall, 2013. "Liquidity and asset-market dynamics," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 275-294.
  3. Veronica Guerrieri & Peter Kondor, 2010. "Fund managers, career concerns, and asset price volatility," Staff Report 446, Federal Reserve Bank of Minneapolis.
  4. Francesco Lippi & Stefania Ragni & Nicholas Trachter, 2013. "State dependent monetary policy," Working Paper 13-17, Federal Reserve Bank of Richmond.
  5. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.
  6. Xavier Ragot & Edouard Challe, 2011. "Precautionary Saving over the Business Cycle," 2011 Meeting Papers 517, Society for Economic Dynamics.
  7. Guido Lorenzoni, 2007. "Inefficient Credit Booms," NBER Working Papers 13639, National Bureau of Economic Research, Inc.
  8. Fabrizio Perri & Jonathan Heathcote, 2011. "Wealth and Volatility," 2011 Meeting Papers 1065, Society for Economic Dynamics.
  9. Edouard Challe & Xavier Ragot, 2013. "Precautionary Saving over the Business Cycle," Working Papers hal-00843150, HAL.
  10. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
  11. Francesco Lippi & Nicholas Trachter, 2011. "The optimum Quantity of Money with Borrowing Constraints," EIEF Working Papers Series 1108, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2011.

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