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Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations


  • Willi Semmler

    () (Department of Economics, New School for Social Research)

  • Levent Koçkesen

    (Department of Economics, Columbia University)


There is a long tradition which maintains that liquidity and credit impact aggregate economic activity. Recent events seem to give fresh support to this line of research. Economic theory on credit and financial markets is in search of mechanisms that might explain the strong propagation effect of real, monetary and financial shocks. We employ a simple macrodynamic model of threshold and regime change type to provide such a propagation mechanism. We estimate the model by transforming our continuous time form into an estimable discrete time form using the Euler approximation and a method proposed by Ozaki. We also approximate the model by employing the discrete time Smooth Transition Regression (STR) methodology. Our estimation procedures are applied to U.S. time series data. We find essential nonlinearities and regime changes in the data. The change of the dynamic properties of the estimated model occur as the variables pass through certain thresholds. Locally unstable but globally bounded fluctuations as well as asymmetric responses to shocks are detected.

Suggested Citation

  • Willi Semmler & Levent Koçkesen, 2017. "Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations," Working Papers 1730, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1730

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    References listed on IDEAS

    1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    2. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-137, March.
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    Cited by:

    1. Carl Chiarella & Peter Flaschel & Willi Semmler, 2001. "The macrodynamics of debt deflation," Chapters,in: Financial Fragility and Investment in the Capitalist Economy, chapter 7 Edward Elgar Publishing.

    More about this item


    Regime change models; Smooth Transition Regression models; financial-real interaction; thresholds; asymmetry in business cycles;

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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