Liquidity and Trading Dynamics

Abstract

In this paper, we build a model where the presence of liquidity constraints tends to magnify the economy's response to aggregate shocks. We consider a decentralized model of trade, where agents may use money or credit to buy goods. When agents do not have access to credit and the real value of money balances is low, agents are more likely to be liquidity constrained. This makes them more concerned about their short-term earning prospects when making their consumption decisions and about their short-term spending opportunities when making their production decisions. This generates a coordination element in spending and production which leads to greater aggregate volatility and greater comovement across producers.

Inefficient Credit Booms

“…Therefore, z 0 > 0, which implies that constraint (8') is binding and k 0 = n + P s π s b 1s k 0 ≥ n > 0. This implies that (27) holds as an equality, and gives (15). Then, (31) implies that k 1s > 0, which, in turn, shows that (28) holds as an equality, giving (14).…”

“…However, a similar motive for hedging aggregate cash-flow shocks arises in general equilibrium. 5 See Bernanke and Gertler (1989), Lamont (1995), Carlstrom and Fuerst (1997), Acemoglu and Zilibotti (1997), Aghion, Banerjee and Piketty (1999), Tornell and Schneider (2003), Rampini (2003), Cooley, Marimon and Quadrini (2004), Guerrieri and Lorenzoni (2007) and references in . 6 "Fire sales" of assets are not present in his model, i.e.…”

Liquidity and Asset Market Dynamics

“…(y ), y t = y . Given q t = q and y t = y , n t is determined by (28). q + and k >k, then (q ; k) = 0 and (q; k) > 0 for all q > q .…”

Household Financial Distress and Household Deleveraging

“…28 This implies that the rate on a 1 year loan goes up by about 3.9% in the first quarter after the shock.…”

“…Two papers that explore the effects of precautionary behavior on business cycle fluctuations are Guerrieri and Lorenzoni (2009) and Challe and Ragot (2011). Both papers, derive analytical results under simplifying assumptions that eliminate the wealth distribution from the problem's state variables.…”