Liquidity, Infinite Horizons and Macroeconomic Fluctuations
Abstract
This paper develops a computable dynamic general equilibrium model in which corporate demand for liquidity is endogenously determined. In the model liquidity demand is motivated by moral hazard as in Holmstrom and Tirole (1998). As a result of incorporating agency cost and endogenously determined liquidity demand, the model can replicate an empirical business-cycle fact, the hump-shaped dynamic response of output, which is hardly observed in standard RBC dynamics. Further, in the model the corporate demand for liquidity from a financial intermediary (credit line, for instance) is pro-cyclical, while the degree of liquidity-dependence (defined as liquidity demand divided by corporate investment) is counter-cyclical. These business cycle patterns are consistent with a stylized fact empirically verified in the Lending View literatureDownload Info
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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 622.Length:
Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:feam04:622
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Related research
Keywords: liqudity; corporate finance; business cycles;Other versions of this item:
- Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, vol. 50(5), pages 1105-1130, July.
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- G3 - Financial Economics - - Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-16 (All new papers)
- NEP-MON-2004-08-16 (Monetary Economics)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Koray Alper, 2007.
"Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections,"
Centre for Growth and Business Cycle Research Discussion Paper Series
93, Economics, The Univeristy of Manchester.
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