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Liquidity constraints, risk premia, and themacroeconomic effects of liquidity shocks

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  • Jaccard, Ivan

Abstract

We study the transmission of liquidity shocks in a dynamic general equilibrium model where firms and households are subject to liquidity risk. The provision of liquidity services is undertaken by financial intermediaries that allocate the stock of liquid asset between the different sectors of the economy. We find that the macroeconomic effects of liquidity shocks are considerably larger in the model economy that generates a realistic equity premium. Liquidity constraints amplify business cycle volatility and have nonlinear effects on risk premia. Our empirical analysis suggests that the Great Recession was primarily caused by liquidity factors. JEL Classification: E44, E51, E32

Suggested Citation

  • Jaccard, Ivan, 2013. "Liquidity constraints, risk premia, and themacroeconomic effects of liquidity shocks," Working Paper Series 1525, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131525
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    Cited by:

    1. 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.
    2. Angelini, Elena & Ca' Zorzi, Michele & Forster, Katrin, 2014. "External and macroeconomic adjustment in the larger euro area countries," Working Paper Series 1647, European Central Bank.
    3. repec:eee:ememar:v:34:y:2018:i:c:p:1-24 is not listed on IDEAS
    4. repec:eee:finana:v:51:y:2017:i:c:p:69-81 is not listed on IDEAS
    5. Michalis Rousakis & Romanos Priftis, 2017. "Deposit Flight and Capital Controls: A Tale from Greece," Economics Series Working Papers 822, University of Oxford, Department of Economics.
    6. Francesco Molteni, 2015. "Liquidity, Government Bonds and Sovereign Debt Crises," Working Papers 2015-32, CEPII research center.
    7. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    8. Ellington, Michael & Florackis, Chris & Milas, Costas, 2017. "Liquidity shocks and real GDP growth: Evidence from a Bayesian time-varying parameter VAR," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 93-117.

    More about this item

    Keywords

    asset pricing; bayesian estimation; Great Recession;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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