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Liquidity and asset-market dynamics

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  • Rocheteau, Guillaume
  • Wright, Randall

Abstract

This study analyzes economies with an essential role for liquid assets in the exchange process. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset-price trajectories that resemble bubbles growing and bursting. Endogenous private and public liquidity is also introduced. Sometimes it is efficient to provide enough liquid assets to satiate demand; other times it is not.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 2 ()
Pages: 275-294

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Handle: RePEc:eee:moneco:v:60:y:2013:i:2:p:275-294

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Web page: http://www.elsevier.com/locate/inca/505566

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Cited by:
  1. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
  2. Pengfei Wang & Lifang Xu & Jianjun Miao, 2013. "Stock Market Bubbles and Unemployment," 2013 Meeting Papers 720, Society for Economic Dynamics.

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