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Endogenous Cycles and Liquidity Risk

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  • Jos van Bommel

    () (University of Oxford)

Abstract

Using an overlapping generations model with liquidity risk, we show that equilibrium aggregate investment and asset prices are cyclical. In an economy with neither a beginning nor an ending date, a stationary equilibrium can be obtained. In a startable equilibrium however, economic activity is highly cyclical. The first generations and consecutive odd ones invest most of their wealth in new long lived technologies, while even generations flock to seasoned claims that are sold by liquidity challenged older cohorts. We find that this liquidity driven cyclicality is driven by the optimal length of the investment horizon, not by agent live span

Suggested Citation

  • Jos van Bommel, 2007. "Endogenous Cycles and Liquidity Risk," Money Macro and Finance (MMF) Research Group Conference 2006 149, Money Macro and Finance Research Group.
  • Handle: RePEc:mmf:mmfc06:149
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    File URL: http://repec.org/mmf2006/up.19138.1148130386.pdf
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    References listed on IDEAS

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    1. Bhattacharya, Sudipto & Padilla, A Jorge, 1996. "Dynamic Banking: A Reconsideration," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 1003-1032.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
    4. Sudipto Bhattacharya & Paolo Fulghieri & Riccardo Rovelli, 1998. "Financial Intermediation Versus Stock Markets in a Dynamic Intertemporal Model," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 291-291, March.
    5. Fulghieri, Paolo & Rovelli, Riccardo, 1998. "Capital markets, financial intermediaries, and liquidity supply," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1157-1180, September.
    6. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
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    More about this item

    Keywords

    Business Cycles; Overlapping Generations; Liquidity;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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