Endogenous Cycles and Liquidity Risk
AbstractUsing an overlapping generations model with liquidity risk, we show that equilibrium aggregate investment and asset prices are cyclical. In an economy with neither a beginning nor an ending date, a stationary equilibrium can be obtained. In a startable equilibrium however, economic activity is highly cyclical. The first generations and consecutive odd ones invest most of their wealth in new long lived technologies, while even generations flock to seasoned claims that are sold by liquidity challenged older cohorts. We find that this liquidity driven cyclicality is driven by the optimal length of the investment horizon, not by agent live span
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Bibliographic InfoPaper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 149.
Date of creation: 02 Feb 2007
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Business Cycles; Overlapping Generations; Liquidity;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-09 (All new papers)
- NEP-DGE-2007-04-09 (Dynamic General Equilibrium)
- NEP-MAC-2007-04-09 (Macroeconomics)
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