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Liquidity and Economic Fluctuations

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  • Filippo Taddei

Abstract

This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity.

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File URL: http://www.carloalberto.org/assets/working-papers/no.138.pdf
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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 138.

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Length: 41 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:cca:wpaper:138

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Related research

Keywords: Liquidity; private information; robust pooling equilibrium; bond yield;

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Cited by:
  1. Alberto Martin & Filippo Taddei, 2010. "International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions," Carlo Alberto Notebooks 160, Collegio Carlo Alberto, revised 2011.
  2. Söderberg, Jonas, 2008. "Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia," CAFO Working Papers 2009:10, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University.
  3. Bertsch, Christoph, 2013. "A detrimental feedback loop: deleveraging and adverse selection," Working Paper Series 277, Sveriges Riksbank (Central Bank of Sweden).

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