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Liquidity, infinite horizons and macroeconomic fluctuations

  • Kato, Ryo
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This paper develops a computable dynamic general equilibrium model in which corporate demand for liquidity is endogenously determined. In the model liquidity demand is motivated by moral hazard as in Holmstrom and Tirole (1998). As a result of incorporating agency cost and endogenously determined liquidity demand, the model can replicate an empirical business-cycle fact, the hump-shaped dynamic response of output, which is hardly observed in standard RBC dynamics. Further, in the model the corporate demand for liquidity from a financial intermediary (credit line, for instance) is pro-cyclical, while the degree of liquidity-dependence (defined as liquidity demand divided by corporate investment) is counter-cyclical. These business cycle patterns are consistent with a stylized fact empirically verified in the Lending View literature

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 50 (2006)
Issue (Month): 5 (July)
Pages: 1105-1130

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Handle: RePEc:eee:eecrev:v:50:y:2006:i:5:p:1105-1130
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  2. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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  5. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
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  9. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply," American Economic Review, American Economic Association, vol. 86(1), pages 310-14, March.
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  12. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  13. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  14. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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  16. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  17. Cogley, Timothy & Nason, James M., 1993. "Impulse dynamics and propagation mechanisms in a real business cycle model," Economics Letters, Elsevier, vol. 43(1), pages 77-81.
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