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Search-Based Endogenous Illiquidity and the Macroeconomy

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  • Wei Cui
  • Sören Radde

Abstract

We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited resaleability of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease funding constraints. We show that liquidity and asset prices positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, the hedging value of liquid assets increases. Our model is thus able to match the flight to liquidity observed during recessions. Finally, we show that investors' search market participation is more intense in a constrained efficient economy.

Suggested Citation

  • Wei Cui & Sören Radde, 2014. "Search-Based Endogenous Illiquidity and the Macroeconomy," Discussion Papers of DIW Berlin 1367, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1367
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    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Search-Based Endogenous Illiquidity and the Macroeconomy
      by Christian Zimmermann in NEP-DGE blog on 2014-04-23 02:10:30

    Citations

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    as


    Cited by:

    1. Feng Dong & Pengfei Wang & Yi Wen, 2016. "Credit search and credit cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 215-239, February.
    2. Wei Cui, 2017. "When Ramsey Searches for Liquidity," 2017 Meeting Papers 1342, Society for Economic Dynamics.
    3. Cui, Wei, 2016. "Monetary–fiscal interactions with endogenous liquidity frictions," European Economic Review, Elsevier, vol. 87(C), pages 1-25.
    4. Shouyong Shi & Melanie Cao, 2015. "Endogenously Procyclical Liquidity, Capital Reallocation, and q," 2015 Meeting Papers 100, Society for Economic Dynamics.
    5. Wei Cui, 2017. "Macroeconomic Effects of Delayed Capital Liquidation," Discussion Papers 1719, Centre for Macroeconomics (CFM).
    6. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2017. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities," American Economic Review, American Economic Association, vol. 107(3), pages 824-857, March.
    7. repec:bin:bpeajo:v:48:y:2017:i:2017-01:p:235-316 is not listed on IDEAS
    8. David M. Arseneau & David Rappoport & Alexandros Vardoulakis, 2017. "Private and Public Liquidity Provision in Over-the-Counter Markets," Finance and Economics Discussion Series 2017-033, Board of Governors of the Federal Reserve System (U.S.).
    9. Hyunju Kang & Bok-Keun Yu & Jongmin Yu, 2016. "Global Liquidity and Commodity Prices," Review of International Economics, Wiley Blackwell, vol. 24(1), pages 20-36, February.
    10. Dong, Feng & Wen, Yi, 2017. "Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis," Working Papers 2017-25, Federal Reserve Bank of St. Louis, revised 10 Oct 2017.
    11. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    12. repec:eee:dyncon:v:81:y:2017:i:c:p:115-139 is not listed on IDEAS
    13. Bilbiie, Florin Ovidiu & Ragot, Xavier, 2017. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," CEPR Discussion Papers 11814, C.E.P.R. Discussion Papers.
    14. Ernst, Ekkehard & Semmler, Willi & Haider, Alexander, 2017. "Debt-deflation, financial market stress and regime change – Evidence from Europe using MRVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 115-139.
    15. Sören Radde & Cristina Checherita-Westphal & Wei Cui, 2015. "Government Bond Liquidity and Sovereign-Bank Interlinkages," SFB 649 Discussion Papers SFB649DP2015-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

    More about this item

    Keywords

    endogenous asset liquidity; search frictions;

    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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