Liquidity,assets and business cycles |
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| Institution: | 1. Research Department, Federal Reserve Bank of St. Louis, P.O. Box 422, St. Louis, MO 63166, United States;2. School of Economics and Management, Tsinghua University, Beijing, China;1. Boston College, Department of Economics, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3859, United States;2. NBER, United States;1. Federal Reserve Bank of St. Louis, United States;2. Simon Fraser University, Canada;3. Washington University in St. Louis, United States;1. Federal Reserve Bank of San Francisco, USA;2. Department of Economics, University of California, Davis, USA;3. Department of Economics, University of Bonn, Germany;4. CEPR, UK;5. Graduate School of Management, University of California, Davis, USA;6. NBER, USA |
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| Abstract: | The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms׳ financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms׳ collateral constraints. Some possible resolutions to this puzzle are discussed. |
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| Keywords: | Liquidity Asset prices Business cycle |
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