Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230490
Authors: 
Horii, Ryo
Ono, Yoshiyasu
Year of Publication: 
2020
Series/Report no.: 
ISER Discussion Paper No. 1085
Abstract: 
In a simple continuous-time model where the learning process affects the willingness to hold liquidity, we provide an intuitive explanation of business cycle asymmetry and post-crisis slow recovery. When observing a liquidity shock, individuals rationally increase their subjective probability of re-encountering it. It leads to an upward jump in liquidity preference and a discrete fall in consumption. Conversely, as a period without shocks continues, they gradually decrease the subjective probability, reduce liquidity preference, and increase consumption. The recovery process is particularly slow after many shocks are observed within a short period because people do not easily change their pessimistic view.
Subjects: 
Bayesian Updating
Liquidity Preference
Markov Switching
Asymmetric Cycles
Persistence
JEL: 
E32
E41
D83
Document Type: 
Working Paper

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