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Liquidity Flows and Fragility of business Enterprises

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  • den Haan, Wouter J.
  • Ramey, Garey
  • Watson, Joel

Abstract

This paper develops a macroeconomic model in which investable assets flow to entrepreneurs through long-term relationships with lenders. Low asset flows cause relationships to brak up due to insufficient liquidity. Multiple Pareto ranked steady staes emerge from complementarity between financial intermediation, reflected by the number of relationships, and households' incentives to provide assets. This complementarity also serves as a mechanism for propagating aggregate shocks. Financial colapse may become inescapable if a shock destorys sufficiently many relationships.

Suggested Citation

  • den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2000. "Liquidity Flows and Fragility of business Enterprises," University of California at San Diego, Economics Working Paper Series qt3d899423, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt3d899423
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    More about this item

    Keywords

    liquidity; aggregate shocks;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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