IDEAS home Printed from https://ideas.repec.org/p/ecm/feam04/622.html
   My bibliography  Save this paper

Liquidity, Infinite Horizons and Macroeconomic Fluctuations

Author

Listed:
  • Ryo Kato

Abstract

This paper develops a computable dynamic general equilibrium model in which corporate demand for liquidity is endogenously determined. In the model liquidity demand is motivated by moral hazard as in Holmstrom and Tirole (1998). As a result of incorporating agency cost and endogenously determined liquidity demand, the model can replicate an empirical business-cycle fact, the hump-shaped dynamic response of output, which is hardly observed in standard RBC dynamics. Further, in the model the corporate demand for liquidity from a financial intermediary (credit line, for instance) is pro-cyclical, while the degree of liquidity-dependence (defined as liquidity demand divided by corporate investment) is counter-cyclical. These business cycle patterns are consistent with a stylized fact empirically verified in the Lending View literature

Suggested Citation

  • Ryo Kato, 2004. "Liquidity, Infinite Horizons and Macroeconomic Fluctuations," Econometric Society 2004 Far Eastern Meetings 622, Econometric Society.
  • Handle: RePEc:ecm:feam04:622
    as

    Download full text from publisher

    File URL: http://aa4a.com/kato/
    File Function: main text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    3. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    4. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
    5. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    6. Einarsson, Tor & Marquis, Milton H, 2001. "Bank Intermediation over the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 876-899, November.
    7. Owen A. Lamont, 2000. "Investment Plans and Stock Returns," Journal of Finance, American Finance Association, vol. 55(6), pages 2719-2745, December.
    8. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
    9. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.
    10. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    11. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    12. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    13. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
    14. Cogley, Timothy & Nason, James M., 1993. "Impulse dynamics and propagation mechanisms in a real business cycle model," Economics Letters, Elsevier, vol. 43(1), pages 77-81.
    15. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply," American Economic Review, American Economic Association, vol. 86(1), pages 310-314, March.
    16. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
    17. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
    18. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Radde, Sören, 2015. "Flight to liquidity and the Great Recession," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 192-207.
    2. von Hagen, Jürgen & Zhang, Haiping, 2008. "Financial frictions, capital reallocation, and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 978-999, March.
    3. Radde, Sören, 2012. "Liquidity Crises, Banking, and the Great Recession," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65408, Verein für Socialpolitik / German Economic Association.
    4. Martin Berka & Christian Zimmermann, 2011. "Basel Accord and financial intermediation: the impact of policy," Working Papers 2011-042, Federal Reserve Bank of St. Louis.
    5. Chatelain, Jean-Bernard & Ralf, Kirsten & Amable, Bruno, 2010. "Patents as Collateral," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1094-1104.
    6. Koray Alper, 2008. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 8(2), pages 33-73.
    7. Hajime Tomura, 2010. "Liquidity Transformation and Bank Capital Requirements," Staff Working Papers 10-22, Bank of Canada.
    8. Ryo Kato & Takayuki Tsuruga, 2011. "Bank Overleverage and Macroeconomic Fragility," IMES Discussion Paper Series 11-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
    9. Niemann, S & Evers, M & Schiffbauer, M, 2007. "Inflation, Investment Composition and Total Factor Productivity," Economics Discussion Papers 2900, University of Essex, Department of Economics.
    10. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The Univeristy of Manchester.
    11. Chris Bloor & Rebecca Craigie & Anella Munro, 2012. "The macroeconomic effects of a stable funding requirement," Reserve Bank of New Zealand Discussion Paper Series DP2012/05, Reserve Bank of New Zealand.
    12. Hajime Tomura, 2014. "Asset Illiquidity and Dynamic Bank Capital Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 1-47, September.
    13. Hitoshi Inoue, 2010. "Capital Adequacy Requirements And The Financial Accelerator Caused By Bank Capital," The Japanese Economic Review, Japanese Economic Association, vol. 61(3), pages 382-407.
    14. Haiping Zhang, 2005. "Speculation in Standard Auctions with Resale," Bonn Econ Discussion Papers bgse11_2005, University of Bonn, Germany.

    More about this item

    Keywords

    liqudity; corporate finance; business cycles;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G3 - Financial Economics - - Corporate Finance and Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:622. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.