Liquidity and Trading Dynamics
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ecta7231.pdf
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379.11 KB
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Author(s)
Guerrieri, Veronica
Lorenzoni, Guido
Date Issued
December 2009
Journal
Econometrica : journal of the Econometric Society
Publisher
Econometric Society
Citation
Guerrieri, Veronica, and Guido Lorenzoni. “Liquidity and Trading Dynamics.” Econometrica 77.6 (2009): 1751-1790.
© 2009 The Econometric Society
Version
Final published version
Abstract
In this paper, we build a model where the presence of liquidity constraints tends to magnify the economy's response to aggregate shocks. We consider a decentralized model of trade, where agents may use money or credit to buy goods. When agents do not have access to credit and the real value of money balances is low, agents are more likely to be liquidity constrained. This makes them more concerned about their short-term earning prospects when making their consumption decisions and about their short-term spending opportunities when making their production decisions. This generates a coordination element in spending and production which leads to greater aggregate volatility and greater comovement across producers.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
http://dx.doi.org/10.3982/ECTA7231
