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The Effects Of News When Liquidity Matters

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  • Chao Gu
  • Han Han
  • Randall Wright

Abstract

We analyze the impact of news (information shocks) in economies where liquidity matters, including those with endogenous credit limits, and those with assets serving as collateral or media of exchange. Although we also consider news about productivity and credit conditions, a leading case concerns monetary policy announcements. Real or monetary news has big effects on markets, potentially causing cyclic or boom–bust responses, even though we focus on the unique transition consistent with stationarity after shocks. In particular, policy announcements may induce instead of reduce volatility. We also discuss the implications for the inflation puzzle, forward‐guidance puzzle, and other apparent anomalies.

Suggested Citation

  • Chao Gu & Han Han & Randall Wright, 2020. "The Effects Of News When Liquidity Matters," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1411-1435, November.
    • Handle: RePEc:wly:iecrev:v:61:y:2020:i:4:p:1411-1435
    DOI: 10.1111/iere.12473
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    References listed on IDEAS

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    Cited by:

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    2. Jiang, Janet Hua & Puzzello, Daniela & Zhang, Cathy, 2023. "Inflation, Output, and Welfare in the Laboratory," European Economic Review, Elsevier, vol. 152(C).

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