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A macroeconomic model of liquidity crises

  • Keiichiro Kobayashi

    ()

    (Keio University)

  • Tomoyuki Nakajima

    ()

    (Kyoto University)

We develop a macroeconomic model in which liquidity plays an essential role in the production process, because firms have a commitment problem regarding factor payments. A liquidity crisis occurs when firms fail to obtain sufficient liquidity, and may be caused either by self-fulfilling beliefs or by fundamental shocks. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity. The government's commitment to guarantee bank deposits reduces the possibility of a self-fulfilling crisis, but it increases that of a fundamental crisis.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP876.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 876.

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Length: 34pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:kyo:wpaper:876
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  19. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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