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Liquidity effects on asset prices, financial stability and economic resilience

  • Dimitrios Tsomocos

    (University of Oxford)

  • Juan Francisco Martinez Sepulveda

    (University of Oxford)

This paper analyzes the different channels of shock transmission in an economy affected by financial frictions. We distinguish between the liquidity and default effects on asset prices. Furthermore, we develop a framework in which we can assess financial stability policy under financial frictions. We introduce a simplified model of trade and financial intermediation that captures the effects of shocks on financial and real variables of the economy. Our results suggest that financial stability and economic resilience to adverse shocks should take into account default in the credit market as well as the liquidity of goods traded in the commodity market.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 916.

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Date of creation: 2012
Date of revision:
Handle: RePEc:red:sed012:916
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Dimitrios P Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," Bank of England working papers 175, Bank of England.
  2. Francisco Covas & Shigeru Fujita, 2010. "Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 137-173, December.
  3. Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A model to analyse financial fragility," LSE Research Online Documents on Economics 24703, London School of Economics and Political Science, LSE Library.
  4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  5. Curdia, Vasco & Woodford, Michael, 2015. "Credit frictions and optimal monetary policy," Working Paper Series 2015-20, Federal Reserve Bank of San Francisco, revised 10 Dec 2015.
  6. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  7. P. Dubey & J. Geanakoplos & M . Shubik, 2001. "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, Stony Brook University, Department of Economics.
  8. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  9. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Staff Working Papers 08-36, Bank of Canada.
  10. Nobuhiro Kiyotaki & John Moore, 2001. "Liquidity, Business Cycles and Monetary Policy (Clarendon Lectures 2)," ESE Discussion Papers 111, Edinburgh School of Economics, University of Edinburgh.
  11. Dimitrios P. Tsomocos, 2003. "Equilibrium Analysis, Banking and Financial Instability," OFRC Working Papers Series 2003fe08, Oxford Financial Research Centre.
  12. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979, December.
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