Liquidity Flows and Fragility of Business Enterprises

UCSD Economics Discussion Paper 99-07R

29 Pages Posted: 23 Apr 2001

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2000

Abstract

This paper develops a macroeconomic model in which investable assets flow to entrepreneurs through long-term relationships with lenders. Low asset flows cause relationships to break up due to insufficient liquidity. Multiple Pareto ranked steady states emerge from complementarity between financial intermediation, reflected by the number of relationships, and households' incentives to provide assets. This complementarity also serves as a mechanism for propagating aggregate shocks. Financial collapse may become inescapable if a shock destroys sufficiently many relationships.

Keywords: Credit Market Relationships, Coordination Failure, Propagation of Shocks, Financial Collapse

JEL Classification: E32, E44

Suggested Citation

Den Haan, Wouter J. and Ramey, Garey and Watson, Joel, Liquidity Flows and Fragility of Business Enterprises (December 2000). UCSD Economics Discussion Paper 99-07R, Available at SSRN: https://ssrn.com/abstract=256057 or http://dx.doi.org/10.2139/ssrn.256057

Wouter J. Den Haan

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 (Contact Author)

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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
92
Abstract Views
1,077
rank
324,061
PlumX Metrics