Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154350
Authors: 
Cui, Wei
Radde, Sören
Year of Publication: 
2016
Series/Report no.: 
ECB Working Paper 1917
Abstract: 
We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited market liquidity of private claims creates a role for liquid assets, such as government bonds or at money, to ease financing constraints. We show that endogenising liquidity is essential to generate positive comovement between asset (re)saleability and asset prices. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, investment falls while the hedging value of liquid assets increases, driving up liquidity premia. Our model, thus, demonstrates that shocks to the cost of financial intermediation can be an important source of flight-to-liquidity dynamics and macroeconomic fluctuations, matching key business cycle characteristics of the U.S. economy.
Subjects: 
asset search markets
endogenous asset liquidity
financial shocks
financing constraints
liquidity premium
JEL: 
E22
E44
G11
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2165-7
Document Type: 
Working Paper

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