Liquidity and asset-market dynamics |
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Authors: | Guillaume Rocheteau Randall Wright |
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Institution: | 1. Department of Economics, University of California - Irvine and FRB Cleveland, USA;2. University of Wisconsin - Madison and FRB Minneapolis, USA |
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Abstract: | This study analyzes economies with an essential role for liquid assets in the exchange process. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset-price trajectories that resemble bubbles growing and bursting. Endogenous private and public liquidity is also introduced. Sometimes it is efficient to provide enough liquid assets to satiate demand; other times it is not. |
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