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Liquidity, Trends and the Great Recession

49 Pages Posted: 4 Jan 2014 Last revised: 16 Apr 2014

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ryo Jinnai

Hitotsubashi University

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Date Written: February 13, 2014

Abstract

We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy’s growth trend. To this end, we propose a model featuring endogenous growth á la Romer and a liquidity friction á la Kiyotaki-Moore. A key finding in our study is that liquidity declined around the demise of Lehman Brothers, which lead to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011.

Suggested Citation

Guerrón-Quintana, Pablo and Jinnai, Ryo, Liquidity, Trends and the Great Recession (February 13, 2014). Tokyo Center for Economic Research (TCER) Paper No. E-66. Available at SSRN: https://ssrn.com/abstract=2374579

Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Ryo Jinnai (Contact Author)

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

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