Liquidity and trading dynamics

Veronica Guerrieri*, Guido Lorenzoni

*Corresponding author for this work

Research output: Contribution to journalArticle

18 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1751-1790
Number of pages40
JournalEconometrica
Volume77
Issue number6
DOIs
StatePublished - Nov 2009

Keywords

  • Aggregate volatility
  • Amplification
  • Liquidity
  • Money
  • Search

ASJC Scopus subject areas

  • Economics and Econometrics

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