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Search-based endogenous asset liquidity and the macroeconomy

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dc.contributor.author Cui, Wei, 1970-
dc.contributor.author Radde, Soeren
dc.date.accessioned 2017-06-21T09:32:40Z
dc.date.available 2017-06-21T09:32:40Z
dc.date.issued 2017-05
dc.identifier.uri http://hdl.handle.net/10230/32388
dc.description.abstract We develop a search-theory of asset market liquidity which gives rise to endogenous financing constraints in an otherwise standard dynamic general equilibrium model. Asset liquidity describes the ease of issuance and re-saleability of private financial claims for a certain price. We model asset liquidity as an outcome of the participation margins of buyers and sellers on an asset market, where financial intermediaries implement a costly search-and-matching process. Limited market liquidity of private claims creates a role for liquid assets, such as fiat money, to ease financing constraints. We show that endogenising liquidity is essential to generate positive co-movement 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 intermediation capacity of financial markets can be an important source of flight-to-liquidity dynamics and macroeconomic fluctuations, matching key business cycle characteristics of the U.S. economy.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries ADEMU Working Paper Series;61
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights.uri https://creativecommons.org/licenses/by/4.0/
dc.title Search-based endogenous asset liquidity and the macroeconomy
dc.type info:eu-repo/semantics/workingPaper
dc.subject.keyword Endogenous asset liquidity
dc.subject.keyword Asset search frictions
dc.subject.keyword Financing constraints
dc.subject.keyword General equilibrium
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess

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