Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/95246
Authors: 
Cui, Wei
Radde, Sören
Year of Publication: 
2014
Series/Report no.: 
DIW Discussion Papers 1367
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 resaleability of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease funding constraints. We show that liquidity and asset prices positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, the hedging value of liquid assets increases. Our model is thus able to match the flight to liquidity observed during recessions. Finally, we show that investors' search market participation is more intense in a constrained efficient economy.
Subjects: 
endogenous asset liquidity
search frictions
JEL: 
E22
E44
E58
Document Type: 
Working Paper

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