Liquidity , Assets and Business Cycles

  title={Liquidity , Assets and Business Cycles},
  author={Shouyong Shi},
Equity price is cyclical and often leads the business cycle. These observations have led to the hypothesis that shocks to equity market liquidity are an independent source of the business cycle. In this paper I construct a tractable model to evaluate this hypothesis. After calibrating the model to the US data, I find that a negative liquidity shock in the equity market can generate large reductions in investment, employment and output but, opposite to what is observed in recessions, the shock… CONTINUE READING