MACRO: Endogenous Liquidity and Capital Reallocation; Tan Chin Tuan Visiting Professor in Banking and Finance – Professor Randall WRIGHT (University of Wisconsin – Madison)

Abstract

This paper studies economies where firms acquire capital in primary markets, then, after idiosyncratic productivity shocks, retrade it in secondary markets incorporating bilateral trade with search, bargaining and liquidity frictions. We distinguish carefully between full or partial sales (one firm gets all or some of the other’s capital), and document several long- and short-run empirical patterns between these variables and the cost of liquidity measured by inflation. Quantitatively, the model can match these patterns plus the facts deemed important in business cycle theory. We also investigate the impact of search frictions, monetary and fiscal policy and persistence in firm specific shocks.

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