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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)

Additional information is available for the following registered author(s):

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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Publisher 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://129.3.20.41

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Related research
Keywords: 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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 777-94, October. [Downloadable!] (restricted)
  4. Keith Sill & Jeff Wrase, 1999. "Exchange rates, monetary policy regimes, and beliefs," Working Papers 99-6, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  5. V. V. Chari & Patrick J. Kehoe, 2003. "Financial Crises as Herds: Overturning the Critiques," NBER Working Papers 9658, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January. [Downloadable!] (restricted)
    Other versions:
  7. 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.
  8. 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.
  9. Veldkamp, Laura L., 2005. "Slow boom, sudden crash," Journal of Economic Theory, Elsevier, vol. 124(2), pages 230-257, October. [Downloadable!] (restricted)
  10. Driffill, John & Miller, Marcus, 1993. "Learning and Inflation Convergence in the ERM," Economic Journal, Royal Economic Society, vol. 103(417), pages 369-78, March. [Downloadable!] (restricted)
  11. David Andolfatto & Paul Gomme, 2003. "Monetary Policy Regimes and Beliefs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February. [Downloadable!] (restricted)
    Other versions:
  12. Zeira, Joseph, 1994. "Informational Cycles," Review of Economic Studies, Blackwell Publishing, vol. 61(1), pages 31-44, January. [Downloadable!] (restricted)
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  14. Simon M. Potter, 2000. "A Nonlinear Model of the Business Cycle," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 4(2). [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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). [Downloadable!]
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