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Occasionally binding liquidity constraints and macroeconomic dynamics

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  • Werner, Maximilian

Abstract

What drives nonlinearities in modern macroeconomic models? Building on global methods, the present paper isolates the effects associated with an occasionally binding constraint in a widely discussed macro-finance framework. Only the proper computational treatment provides a holistic understanding of the (hidden) economics in tail events, and the full reflection of large and consecutive shocks in economic forecasts. An improper treatment provides an overestimation of asset pricing dynamics and a misleading association between high levels of capital and liquidity and high levels of investment.

Suggested Citation

  • Werner, Maximilian, 2023. "Occasionally binding liquidity constraints and macroeconomic dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:dyncon:v:150:y:2023:i:c:s0165188923000155
    DOI: 10.1016/j.jedc.2023.104609
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    More about this item

    Keywords

    Occasionally binding constraints; Global nonlinearities; Financial frictions; Liquidity; Business cycles;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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