IDEAS home Printed from https://ideas.repec.org/a/gam/jecnmx/v11y2023i4p27-d1298773.html
   My bibliography  Save this article

Liquidity and Business Cycles—With Occasional Disruptions

Author

Listed:
  • Willi Semmler

    (Department of Economics, The New School for Social Research, New York, NY 10003, USA
    Department of Economics, Bielefeld University, 33615 Bielefeld, Germany
    These authors contributed equally to this work.)

  • Gabriel R. Padró Rosario

    (Department of Economics, The New School for Social Research, New York, NY 10003, USA
    These authors contributed equally to this work.)

  • Levent Koçkesen

    (Department of Economics, Nazarbayev University, Astana 010000, Kazakhstan
    These authors contributed equally to this work.)

Abstract

Some financial disruptions that started in California, U.S., in March 2023, resulting in the closure of several medium-size U.S. banks, shed new light on the role of liquidity in business cycle dynamics. In the normal path of the business cycle, liquidity and output mutually interact. Small shocks generally lead to mean reversion through market forces, as a low degree of liquidity dissipation does not significantly disrupt the economic dynamics. However, larger shocks and greater liquidity dissipation arising from runs on financial institutions and contagion effects can trigger tipping points, financial disruptions, and economic downturns. The latter poses severe challenges for Central Banks, which during normal times, usually maintain a hands-off approach with soft regulation and monitoring, allowing the market to operate. However, in severe times of liquidity dissipation, they must swiftly restore liquidity flows and rebuild trust in stability to avoid further disruptions and meltdowns. In this paper, we present a nonlinear model of the liquidity–macro interaction and econometrically explore those types of dynamic features with data from the U.S. economy. Guided by a theoretical model, we use nonlinear econometric methods of a Smooth Transition Regression type to study those features, which provide and suggest further regulation and monitoring guidelines and institutional enforcement of rules.

Suggested Citation

  • Willi Semmler & Gabriel R. Padró Rosario & Levent Koçkesen, 2023. "Liquidity and Business Cycles—With Occasional Disruptions," Econometrics, MDPI, vol. 11(4), pages 1-20, December.
    • Handle: RePEc:gam:jecnmx:v:11:y:2023:i:4:p:27-:d:1298773
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2225-1146/11/4/27/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2225-1146/11/4/27/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
    2. Silvia Albrizio & Iván Kataryniuk & Luis Molina & Jan Schäfer, 2021. "ECB euro liquidity lines," Working Papers 2125, Banco de España.
    3. Semmler, Willi & Sieveking, Malte, 1993. "Nonlinear liquidity-growth dynamics with corridor-stability," Journal of Economic Behavior & Organization, Elsevier, vol. 22(2), pages 189-208, October.
    4. Robert W. Dimand, 2005. "Fisher, Keynes, and the Corridor of Stability," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 185-199, January.
    5. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bouvatier, Vincent & López-Villavicencio, Antonia & Mignon, Valérie, 2014. "Short-run dynamics in bank credit: Assessing nonlinearities in cyclicality," Economic Modelling, Elsevier, vol. 37(C), pages 127-136.
    2. Willi Semmler & Fabio Della Rossa & Giuseppe Orlando & Gabriel R. Padro Rosario & Levent Kockesen, 2023. "Endogenous Economic Resilience, Loss of Resilience, Persistent Cycles, Multiple Attractors, and Disruptive Contractions," Working Papers 2309, New School for Social Research, Department of Economics.
    3. Aslanidis, Nektarios & Christiansen, Charlotte, 2012. "Smooth transition patterns in the realized stock–bond correlation," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 454-464.
    4. Sharon McCaw, 2007. "Stylised facts about New Zealand business cycles," Reserve Bank of New Zealand Discussion Paper Series DP2007/04, Reserve Bank of New Zealand.
    5. Coudert, Virginie & Mignon, Valérie, 2013. "The “forward premium puzzle” and the sovereign default risk," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 491-511.
    6. Reitz, Stefan & Rülke, Jan & Stadtmann, Georg, 2012. "Nonlinear Expectations in Speculative Markets," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62045, Verein für Socialpolitik / German Economic Association.
    7. Reitz, Stefan & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "Nonlinear expectations in speculative markets – Evidence from the ECB survey of professional forecasters," Journal of Economic Dynamics and Control, Elsevier, vol. 36(9), pages 1349-1363.
    8. Henry, Olan T. & Olekalns, Nilss & Suardi, Sandy, 2007. "Testing for rate dependence and asymmetry in inflation uncertainty: Evidence from the G7 economies," Economics Letters, Elsevier, vol. 94(3), pages 383-388, March.
    9. Andres, Javier & Domenech, Rafael & Fatas, Antonio, 2008. "The stabilizing role of government size," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 571-593, February.
    10. Daniel Buncic, 2012. "Understanding forecast failure of ESTAR models of real exchange rates," Empirical Economics, Springer, vol. 43(1), pages 399-426, August.
    11. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
    12. Owolabi, Adegboyega O. & Berdiev, Aziz N. & Saunoris, James W., 2022. "Is the shadow economy procyclical or countercyclical over the business cycle? International evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 257-270.
    13. Richard H. Clarida & Mark P. Taylor, 2003. "Nonlinear Permanent - Temporary Decompositions in Macroeconomics and Finance," Economic Journal, Royal Economic Society, vol. 113(486), pages 125-139, March.
    14. Marco Gallegati & Mauro Gallegati, 2005. "Wavelet variance and correlation analyses of output in G7 countries," Macroeconomics 0512017, University Library of Munich, Germany.
    15. Mohamed CHIKHI & Claude DIEBOLT, 2022. "Testing the weak form efficiency of the French ETF market with the LSTAR-ANLSTGARCH approach using a semiparametric estimation," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 13, pages 228-253, June.
    16. Charles Ka Yui Leung & Joe Cho Yiu Ng, 2018. "Macro Aspects of Housing," GRU Working Paper Series GRU_2018_016, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    17. João T. Jalles, 2022. "Do credit rating agencies reward fiscal prudence?," International Finance, Wiley Blackwell, vol. 25(1), pages 2-22, April.
    18. Javier J. Pérez & Jesús Rodríguez López & Carlos Usabiaga, 2002. "Análisis Dinámico de la Relación entre Ciclo Económico y Ciclo del Desempleo en Andalucía en Comparación con el Resto de España," Economic Working Papers at Centro de Estudios Andaluces E2002/07, Centro de Estudios Andaluces.
    19. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
    20. Mehmet Balcilar & Rangan Gupta & Stephen M. Miller, 2015. "The out-of-sample forecasting performance of nonlinear models of regional housing prices in the US," Applied Economics, Taylor & Francis Journals, vol. 47(22), pages 2259-2277, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecnmx:v:11:y:2023:i:4:p:27-:d:1298773. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.