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Search-Based Endogenous Illiquidity and the Macroeconomy

Author

Listed:
  • Soren Radde

    (European Central Bank)

  • Wei Cui

    (University College London)

Abstract
We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited funding ability of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease funding constraints. We show that liquidity and asset prices can positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, investment drops while the hedging value of liquid assets increases. Our model is thus able to match the liquidity hoarding observed during recessions, together with the dynamics of key macro variables.

Suggested Citation

  • Soren Radde & Wei Cui, 2015. "Search-Based Endogenous Illiquidity and the Macroeconomy," 2015 Meeting Papers 546, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:546
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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