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Liquidity, Trends and the Great Recession

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  • Pablo A. Guerron-Quintana

    (Federal Reserve Bank of Philadelphia)

  • Ryo Jinnai

    (Texas A&M University)

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    Abstract

    We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy’s growth trend. To this end, we propose a model featuring endogenous growth á la Romer and a liquidity friction á la Kiyotaki-Moore. A key finding in our study is that liquidity declined around the demise of Lehman Brothers, which lead to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011.

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    File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp031.pdf
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    Bibliographic Info

    Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 015.

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    Length: 51 pages
    Date of creation: Nov 2013
    Date of revision:
    Handle: RePEc:upd:utppwp:015

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    Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
    Phone: +81-3-3812-2111
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    Web page: http://www.e.u-tokyo.ac.jp/
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    1. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
    2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
    3. Ohtake, Fumio & Shintani, Mototsugu, 1996. "The effect of demographics on the Japanese housing market," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(2), pages 189-201, April.
    4. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 1-24, May.
    5. Hendershott, Patric H., 1991. "Are real house prices likely to decline by 47 percent?," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 21(4), pages 553-563, December.
    6. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
    7. Hamilton, Bruce W., 1991. "The baby boom, the baby bust, and the housing market A second look," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 21(4), pages 547-552, December.
    8. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 19(2), pages 235-258, May.
    9. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 90(1), pages 1-44, May.
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