Liquidity Flows and Fragility of Business Enterprises

51 Pages Posted: 14 Aug 2012 Last revised: 15 Apr 2022

See all articles by Wouter J. den Haan

Wouter J. den Haan

University of Amsterdam; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics

Joel Watson

University of California, San Diego (UCSD) - Department of Economics

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Date Written: March 1999

Abstract

This paper considers the efficiency of financial intermediation and the propagation of business cycle shocks in a model of long-term relationships between entrepreneurs and lenders lenders may be constrained in their short-run access to liquidity. When liquidity is low, relationships are subject to breakups that lead to loss of joint surplus. Liquidity outflows cause damage to financial structure by breaking up relationships, and damage persists due to frictions in the formation of new relationships. Feedbacks between aggregate investment and the structure of intermediation greatly magnify the effects of shocks. For large shocks, financial collapse may become inescapable in the absence of external intervention.

Suggested Citation

Den Haan, Wouter J. and Ramey, Garey and Watson, Joel, Liquidity Flows and Fragility of Business Enterprises (March 1999). NBER Working Paper No. w7057, Available at SSRN: https://ssrn.com/abstract=158176

Wouter J. Den Haan (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.feb.uva.nl/toe/content/people/content/denhaan/pers.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-5721 (Phone)
858-534-7040 (Fax)

Joel Watson

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-6132 (Phone)
619-534-7040 (Fax)

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