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Liquidity and Economic Fluctuations

  • Filippo Taddei

This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity.

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File URL: http://www.carloalberto.org/assets/working-papers/no.138.pdf
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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 138.

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Length: 41 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:cca:wpaper:138
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