Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations
This paper examines a mechanism of liquidity-preference fluctuations caused by people's learning behavior. % about the frequency of a liquidity shock. When observing a financial shock, they rationally update their belief so that the subjective probability of encountering it again is higher, immediately raise liquidity preference and reduce consumption. As a period without the shock lasts after that, they gradually decrease the subjective probability, lower liquidity preference and increase consumption. Particularly, when the shock is observed many times in succession, recovery is first slow because people do not easily change their pessimistic view, then gradually accelerates, and eventually slows down as they become fully optimistic.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Andolfatto & Paul Gomme, 1997.
"Monetary Policy Regimes and Beliefs,"
Cahiers de recherche CREFE / CREFE Working Papers
48, CREFE, Université du Québec à Montréal, revised Apr 2001.
- David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
- David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
- Simon M. Potter & Edward E. Leamer, 2004.
"A Nonlinear Model of the Business Cycle,"
Econometric Society 2004 North American Winter Meetings
490, Econometric Society.
- Daniel Piazolo, 1999. "Representing transition countries with computable general equilibrium models," International Advances in Economic Research, International Atlantic Economic Society, vol. 5(2), pages 270-270, May.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Laura Veldkamp, 2003.
"Learning Asymmetries in Real Business Cycles,"
03-21, New York University, Leonard N. Stern School of Business, Department of Economics.
- Lee, I.H. & Chalkley, M., 1994. "Asymmetric business cycles," Discussion Paper Series In Economics And Econometrics 9411, Economics Division, School of Social Sciences, University of Southampton.
- Keith Sill & Jeff Wrase, 2000.
"Exchange Rates, Monetary Policy Regimes, and Beliefs,"
Econometric Society World Congress 2000 Contributed Papers
1701, Econometric Society.
- Keith Sill & Jeffrey M. Wrase, 1999. "Exchange rates, monetary policy regimes, and beliefs," Working Papers 99-6, Federal Reserve Bank of Philadelphia.
- Ono, Yoshiyasu, 2001. "A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 207-36, February.
- Chamley, Christophe & Gale, Douglas, 1994.
"Information Revelation and Strategic Delay in a Model of Investment,"
Econometric Society, vol. 62(5), pages 1065-85, September.
- Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
- Chari, V. V. & Kehoe, Patrick J., 2004.
"Financial crises as herds: overturning the critiques,"
Journal of Economic Theory,
Elsevier, vol. 119(1), pages 128-150, November.
- V. V. Chari & Patrick J. Kehoe, 2003. "Financial Crises as Herds: Overturning the Critiques," NBER Working Papers 9658, National Bureau of Economic Research, Inc.
- V. V. Chari & Patrick J. Kehoe, 2003. "Financial crises as herds: overturning the critiques," Staff Report 316, Federal Reserve Bank of Minneapolis.
- Boldrin, Michele & Levine, David K., 2001.
"Growth Cycles and Market Crashes,"
Journal of Economic Theory,
Elsevier, vol. 96(1-2), pages 13-39, January.
- Veldkamp, Laura L., 2005. "Slow boom, sudden crash," Journal of Economic Theory, Elsevier, vol. 124(2), pages 230-257, October.
- Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 777-94, October.
- Zeira, Joseph, 1994. "Informational Cycles," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 31-44, January.
- Driffill, John & Miller, Marcus, 1993. "Learning and Inflation Convergence in the ERM," Economic Journal, Royal Economic Society, vol. 103(417), pages 369-78, March.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0504016. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.