TY - JOUR
T1 - Liquidity, assets and business cycles
AU - Shi, Shouyong
N1 - Funding Information:
An anonymous referee provided useful comments. This paper has been presented at the Cireq-Ensai macro conference (Rennes, France), U. Southampton, U. Waterloo, the Canadian Macro Study Group meeting (2012), the Fall Conference at the St. Louis Federal Reserve Bank (2012), the Econometric Society Summer meeting (2012), Zhejiang U. (China), Fudan U. (Shanghai), the Federal Reserve Bank of Chicago Workshop on Money, Banking, and Payments (2011), the Asian Econometric Society meeting (2011), the Canon Institute for Global Studies (Tokyo), the International Economic Association meeting (2011), and the Canadian Economic Association meeting (as the Bank of Canada Lecture, 2011). I am grateful to Nobu Kiyotaki for many conversations on the topic, to Andrea Ajello and Igor Livshits for comments, and to Andrea Ferrero for giving me some of the computing codes. Li Li provided excellent research assistance. I gratefully acknowledge financial support from the Canada Research Chair, the Bank of Canada Fellowship, the Social Sciences and Humanities Research Council of Canada, and Pennsylvania State University. The view expressed here is my own and does not reflect the view of the Bank of Canada.
Publisher Copyright:
© 2014 Elsevier B.V.
PY - 2015/3/1
Y1 - 2015/3/1
N2 - The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms' financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms' collateral constraints. Some possible resolutions to this puzzle are discussed.
AB - The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms' financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms' collateral constraints. Some possible resolutions to this puzzle are discussed.
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U2 - 10.1016/j.jmoneco.2014.10.002
DO - 10.1016/j.jmoneco.2014.10.002
M3 - Article
AN - SCOPUS:84926349331
SN - 0304-3932
VL - 70
SP - 116
EP - 132
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -