Affiliation:
1. Finance and Economics Division, Columbia Business School, 3022 Broadway, 814 Uris Hall, New York, NY 10027 (e-mail: )
Abstract
I study an economy where asymmetric information about the quality of capital endogenously determines liquidity. Liquid funds are key to relaxing financial constraints on investment and employment. These funds are obtained by selling capital or using it as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality, which raise the cost of obtaining liquidity. An estimated version of the model can generate patterns for quantities and credit conditions similar to the Great Recession. (JEL D82, E22, E24, E32, E44, G01)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
100 articles.
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