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Whither Liquidity Shocks?

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Listed:
  • Giorgio Massari
  • Patrizio Tirelli

Abstract

We show that popular models of (flight-to-) liquidity shocks have strongly counterfactual implications for asset returns and the composition of firms' liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. Further, the implied estimate of the natural interest rate entails that the interest rate gap rose during recessions and fell thereafter. By including the relevant financial variables as observables in our empirical model, we can show that liquidity shocks played a negligible role and became virtually irrelevant after 2010. We also find that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate.

Suggested Citation

  • Giorgio Massari & Patrizio Tirelli, 2022. "Whither Liquidity Shocks?," Working Papers 502, University of Milano-Bicocca, Department of Economics.
    • Handle: RePEc:mib:wpaper:502
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    References listed on IDEAS

    as
    1. Suh, Hyunduk & Walker, Todd B., 2016. "Taking financial frictions to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 64(C), pages 39-65.
    2. Becker, Bo & Ivashina, Victoria, 2014. "Cyclicality of credit supply: Firm level evidence," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 76-93.
    3. Bekiros, Stelios & Nilavongse, Rachatar & Uddin, Gazi Salah, 2018. "Bank capital shocks and countercyclical requirements: Implications for banking stability and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 315-331.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    natural rate of interest; DSGE models; liquidity shocks; flight-to-quality; financial frictions;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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