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Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations

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Author Info

  • 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.

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File URL: http://128.118.178.162/eps/mac/papers/0504/0504016.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0504016.

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Length: 37 pages
Date of creation: 12 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0504016

Note: Type of Document - pdf; pages: 37
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Web page: http://128.118.178.162

Related research

Keywords: Bayesian Learning; Liquidity Preference; Precautionary Motive; Markov Switching;

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References

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  1. Keith Sill & Jeff Wrase, 2000. "Exchange Rates, Monetary Policy Regimes, and Beliefs," Econometric Society World Congress 2000 Contributed Papers 1701, Econometric Society.
  2. Driffill, John & Miller, Marcus, 1993. "Learning and Inflation Convergence in the ERM," Economic Journal, Royal Economic Society, vol. 103(417), pages 369-78, March.
  3. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
  4. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January.
  5. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May.
  6. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-85, September.
  7. V. V. Chari & Patrick J. Kehoe, 2003. "Financial Crises as Herds: Overturning the Critiques," NBER Working Papers 9658, National Bureau of Economic Research, Inc.
  8. Potter Simon M., 2000. "A Nonlinear Model of the Business Cycle," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 4(2), pages 1-11, July.
  9. Veldkamp, Laura L., 2005. "Slow boom, sudden crash," Journal of Economic Theory, Elsevier, vol. 124(2), pages 230-257, October.
  10. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 777-94, October.
  11. Zeira, Joseph, 1994. "Informational Cycles," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 31-44, January.
  12. Ono, Yoshiyasu, 2001. "A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 207-36, February.
  13. Lee, I.H. & Chalkley, M., 1994. "Asymmetric business cycles," Discussion Paper Series In Economics And Econometrics 9411, Economics Division, School of Social Sciences, University of Southampton.
  14. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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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 and Osaka School of International Public Policy (OSIPP).

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