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A macroeconomic model of liquidity crises

Listed author(s):
  • Keiichiro Kobayashi

    (Faculty of Economics, Keio University,)

  • Tomoyuki Nakajima

    (Institute of Economic Research,Kyoto University and CIGS)

We develop a macroeconomic model in which liquidity plays an essential role in the production process, because _rms have a commitment problem regarding factor payments. A liquidity crisis occurs when _rms fail to obtain su_cient liquidity, and may be caused either by self-ful_lling beliefs or by fundamental shocks. Our model is consistent with the observation that the decline in output during the Great Recession is mostly attributable to the deterioration in the labor wedge, rather than in productivity. The government's commitment to guarantee bank deposits reduces the possibility of a self-fulfilling crisis, but it increases that of a fundamental crisis.

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File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp039.pdf
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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 022.

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Length: 35 pages
Date of creation: Mar 2014
Handle: RePEc:upd:utppwp:022
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
Web page: http://www.e.u-tokyo.ac.jp/
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