Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations
AbstractThis 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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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0504016.
Length: 37 pages
Date of creation: 12 Apr 2005
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Note: Type of Document - pdf; pages: 37
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Bayesian Learning; Liquidity Preference; Precautionary Motive; Markov Switching;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- 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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