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Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations

Author

Listed:
  • Ryo Horii

    (Graduate School of Economics, Osaka University)

  • Yoshiyasu Ono

    (ISER, Osaka University)

Abstract

This paper examines a mechanism of liquidity-preference fluctuations caused by people's learning behavior. % about the frequency of a liquidity shock. When observing a financial shock, they rationally update their belief so that the subjective probability of encountering it again is higher, immediately raise liquidity preference and reduce consumption. As a period without the shock lasts after that, they gradually decrease the subjective probability, lower liquidity preference and increase consumption. Particularly, when the shock is observed many times in succession, recovery is first slow because people do not easily change their pessimistic view, then gradually accelerates, and eventually slows down as they become fully optimistic.

Suggested Citation

  • Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0504016
    Note: Type of Document - pdf; pages: 37
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0504/0504016.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ryo Horii & Yoshiyasu Ono, 2006. "Learning, Inflation Cycles, and Depression," Discussion Papers in Economics and Business 06-14, Osaka University, Graduate School of Economics.

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    More about this item

    Keywords

    Bayesian Learning; Liquidity Preference; Precautionary Motive; Markov Switching;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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