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Liquidity, Trends and the Great Recession

  • Pablo A. Guerron-Quintana

    (Federal Reserve Bank of Philadelphia)

  • Ryo Jinnai

    (Texas A&M University)

We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy’s growth trend. To this end, we propose a model featuring endogenous growth á la Romer and a liquidity friction á la Kiyotaki-Moore. A key finding in our study is that liquidity declined around the demise of Lehman Brothers, which lead to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011.

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Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 015.

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Length: 51 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:upd:utppwp:015
Contact details of provider: Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
Phone: +81-3-3812-2111
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