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Search-based Endogenous Asset Liquidity and the Macroeconomy
[Why Don’t US Issuers Demand European Fees for IPOs?]

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  • Wei Cui
  • Sören Radde

Abstract

We develop a search-theory of asset liquidity which gives rise to endogenous financing constraints on investment in an otherwise standard dynamic general equilibrium model. Asset liquidity describes the ease of issuance and resaleability of private financial claims, which is the outcome of a costly search-and-matching process for such claims implemented by financial intermediaries. Limited liquidity of private claims creates a role for liquid assets, such as government bonds, to ease financing constraints. We show that endogenising liquidity is essential to generate positive co-movement between asset liquidity and asset prices. When the cost of intermediating funds to entrepreneurs rises, investment and output fall whereas the hedging value of liquid assets increases, driving up liquidity premia. In the United States, such intermediation cost shocks can account for at least 37% of the variation in output, and more than 78% of the variation in liquidity premia.

Suggested Citation

  • Wei Cui & Sören Radde, 2020. "Search-based Endogenous Asset Liquidity and the Macroeconomy [Why Don’t US Issuers Demand European Fees for IPOs?]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2221-2269.
  • Handle: RePEc:oup:jeurec:v:18:y:2020:i:5:p:2221-2269.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvz037
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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