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Learning, Liquidity Preference, and Business Cycle

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  • Ryo Horii
  • Yoshiyasu Ono

Abstract

This paper examines a mechanism of liquidity-preference fluctuations caused by changes in people's belief about a random liquidity shock. When observing the shock, they rationally update their belief so that the shock probability is higher; consequently they raise liquidity preference and reduce consumption. As the period without the shock lasts, they become more optimistic so that they gradually lower liquidity preference and increase consumption. The recovery pattern depends on the realized frequency of the shock: when the shock occurs many times in succession, the consumption recovery is first slow, gradually accelerates and eventually slows down, tracing an 'S'-shaped curve.

Suggested Citation

  • Ryo Horii & Yoshiyasu Ono, 2004. "Learning, Liquidity Preference, and Business Cycle," ISER Discussion Paper 0601, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0601
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2004/DP0601.pdf
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    References listed on IDEAS

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    6. Keith Sill & Jeff Wrase, 1999. "Exchange rates, monetary policy regimes, and beliefs," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 5(2), pages 270-270, May.
    7. Lee, I.H. & Chalkley, M., 1994. "Asymmetric business cycles," Discussion Paper Series In Economics And Econometrics 9411, Economics Division, School of Social Sciences, University of Southampton.
    8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    9. Ono, Yoshiyasu, 2001. "A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 207-236, February.
    10. Driffill, John & Miller, Marcus, 1993. "Learning and Inflation Convergence in the ERM," Economic Journal, Royal Economic Society, vol. 103(417), pages 369-378, March.
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    Cited by:

    1. Werner Hölzl & Peter Huber, 2014. "Firm Level Job Creation Rates Over The Business Cycle," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(6), pages 837-852, June.

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