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Liquidity constraints, risk premia, and themacroeconomic effects of liquidity shocks

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  • Jaccard, Ivan

Abstract

We study the transmission of liquidity shocks in a dynamic general equilibrium model where firms and households are subject to liquidity risk. The provision of liquidity services is undertaken by financial intermediaries that allocate the stock of liquid asset between the different sectors of the economy. We find that the macroeconomic effects of liquidity shocks are considerably larger in the model economy that generates a realistic equity premium. Liquidity constraints amplify business cycle volatility and have nonlinear effects on risk premia. Our empirical analysis suggests that the Great Recession was primarily caused by liquidity factors. JEL Classification: E44, E51, E32

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  • Jaccard, Ivan, 2013. "Liquidity constraints, risk premia, and themacroeconomic effects of liquidity shocks," Working Paper Series 1525, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20131525
    Note: 737337
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    Cited by:

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    2. Elena Angelini & Michele Ca’ Zorzi & Katrin Forster van Aerssen, 2016. "External and Macroeconomic Adjustment in the Larger Euro-Area Countries," International Finance, Wiley Blackwell, vol. 19(3), pages 269-291, December.
    3. Ellington, Michael, 2018. "Financial market illiquidity shocks and macroeconomic dynamics: Evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 225-236.
    4. Hadhri, Sinda & Ftiti, Zied, 2019. "Commonality in liquidity among Middle East and North Africa emerging stock markets: Does it really matter?," Economic Systems, Elsevier, vol. 43(3).
    5. Chowdhury, Anup & Uddin, Moshfique & Anderson, Keith, 2018. "Liquidity and macroeconomic management in emerging markets," Emerging Markets Review, Elsevier, vol. 34(C), pages 1-24.
    6. Apergis, Nicholas & Dastidar, Sayantan Ghosh, 2024. "Local stock liquidity and local factors: Fresh evidence from US firms across states," Research in International Business and Finance, Elsevier, vol. 67(PA).
    7. Evgenidis, Anastasios & Tsagkanos, Athanasios, 2017. "Asymmetric effects of the international transmission of US financial stress. A threshold-VAR approach," International Review of Financial Analysis, Elsevier, vol. 51(C), pages 69-81.
    8. Romanos Priftis, 2017. "Deposit Flight and Capital Controls: A Tale from Greece," Economics Series Working Papers 822, University of Oxford, Department of Economics.
    9. Francesco Molteni, 2015. "Liquidity, Government Bonds and Sovereign Debt Crises," Working Papers 2015-32, CEPII research center.
    10. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    11. Ellington, Michael & Florackis, Chris & Milas, Costas, 2017. "Liquidity shocks and real GDP growth: Evidence from a Bayesian time-varying parameter VAR," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 93-117.
    12. Gutkowski, Violeta A., 2021. "Sovereign illiquidity and recessions," Journal of Economic Dynamics and Control, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    asset pricing; bayesian estimation; Great Recession;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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