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Liquidity and Trading Dynamics

Author(s)
Guerrieri, Veronica; Lorenzoni, Guido
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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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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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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.
Date issued
2009-12
URI
http://hdl.handle.net/1721.1/52315
Department
Massachusetts Institute of Technology. Department of Economics
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
ISSN
0012-9682

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