Liquidity and trading dynamics
By: Veronica Guerrieri, Guido Lorenzoni
Contributors: Lorenzoni, Guido; National Bureau of Economic Research
Series: NBER working paper series -- working paper 13204; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13204.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "How do financial frictions affect the response of an economy to aggregate shocks? In this paper, we address this question, focusing on liquidity constraints and uninsurable idiosyncratic risk.  We consider a search model where agents use liquid assets to smooth individual income shocks.  We show that the response of this economy to aggregate shocks depends on the rate of return on liquid assets.  In economies where liquid assets pay a low return, agents hold smaller liquid reserves and the response of the economy tends to be larger.  In this case, agents expect to be liquidity constrained and, due to a self-insurance motive, their consumption decisions are more sensitive to changes in expected income.  On the other hand, in economies where liquid assets pay a large return, agents hold larger reserves and their consumption decisions are more insulated from income uncertainty.  Therefore, aggregate shocks tend to have larger effects if liquid assets pay a lower rate of return"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/31/2007.

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