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Liquidity, Infinite Horizons and Macroeconomic Fluctuations

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Author Info
Ryo Kato

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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 literature

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Publisher Info
Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 622.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:622

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Related research
Keywords: liqudity corporate finance business cycles

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
G3 - Financial Economics - - Corporate Finance and Governance

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  1. 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. [Downloadable!]
  2. Stefan Niemann & Michael Evers & Marc Schiffbauer, 2007. "Inflation, Investment Composition and Total Factor Productivity," Economics Discussion Papers 632, University of Essex, Department of Economics. [Downloadable!]
  3. Haiping Zhang, 2005. "Speculation in Standard Auctions with Resale," Bonn Econ Discussion Papers bgse11_2005, University of Bonn, Germany. [Downloadable!]
  4. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The Univeristy of Manchester. [Downloadable!]
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