Work in Progress
- "Production-Based Asset Pricing in a Real Business Cycle Model with Endogenous Liquidity"
- "Endogenous Liquidity in a New Keynesian DSGE Model"
Recent literature investigating liquidity shocks in real business cycle models has had difficulty reproducing the behavior of asset prices over the business cycle. This paper builds a real business cycle model in which liquidity is endogenously determined. In the model, the existence of a collateral constraint is motivated by limited enforcement of contracts. Changes in liquidity are related to the risk that a borrower fails to repay a loan. The paper describes the transmission mechanisms generated by endogenizing liquidity and quantifies the effect on business cycle moments and asset prices. The results suggest that endogenous liquidity improves the asset pricing moments of the model, but that changes in liquidity have little effect on other business cycle moments.