Business Intelligence

Liquidity And Asset Market Dynamics

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Executive Summary

The authors study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset price trajectories that resemble bubbles growing and bursting. They also analyze endogenous private and public liquidity provision. Sometimes it is efficient to have enough liquid assets to satiate demand; other times it is not.

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