Research Archive

Endogenous Liquidity and the Business Cycle

Publication type: Working paper

Research Archive Topic: Business Economics and Public Policy, Corporate Finance


I present a model in which asymmetric information in capital quality endogenously determines the amount liquidity in an economy. Liquid funds are key to relax fi nancial constraints that aff ect investment and employment decisions. These funds are obtained by selling capital or using capital as collateral. Liquidity is determined by balancing the costs of obtaining funding under asymmetric information and the bene fits of relaxing fi nancial constraints. Aggregate fluctuations can be attributed to increases in the dispersion of capital quality which increment the cost of obtaining liquidity. The model can generate patterns for quantities and credit conditions similar to the Great Recession.
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Bigio, Saki. "Endogenous Liquidity and the Business Cycle." Columbia Business School, March 15, 2013.

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