Learning, Liquidity Preference, and Business Cycle
Abstract
This paper examines a mechanism of liquidity-preference fluctuations caused by changes in people's belief about a random liquidity shock. When observing the shock, they rationally update their belief so that the shock probability is higher; consequently they raise liquidity preference and reduce consumption. As the period without the shock lasts, they become more optimistic so that they gradually lower liquidity preference and increase consumption. The recovery pattern depends on the realized frequency of the shock: when the shock occurs many times in succession, the consumption recovery is first slow, gradually accelerates and eventually slows down, tracing an 'S'-shaped curve.Download Info
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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0601.Length:
Date of creation: Mar 2004
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Handle: RePEc:dpr:wpaper:0601
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