Learning, Liquidity Preference, and Business Cycle

35 Pages Posted: 27 Apr 2004

See all articles by Ryo Horii

Ryo Horii

Osaka University - Institute of Social and Economic Research

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: March 2004

Abstract

This paper examines a mechanism of liquidity-preference fluctuations caused by changes in people's belief about a random liquidity shock. When observing the shock, they rationally update their belief so that the shock probability is higher; consequently they raise liquidity preference and reduce consumption. As the period without the shock lasts, they become more optimistic so that they gradually lower liquidity preference and increase consumption. The recovery pattern depends on the realized frequency of the shock: when the shock occurs many times in succession, the consumption recovery is first slow, gradually accelerates and eventually slows down, tracing an 'S'-shaped curve.

Keywords: Bayesian learning, liquidity preference, precautionary motive, business cycle, Markov switching

JEL Classification: D83, E41, E32

Suggested Citation

Horii, Ryo and Ono, Yoshiyasu, Learning, Liquidity Preference, and Business Cycle (March 2004). Osaka University Social and Economic Research Discussion Paper No. 601. Available at SSRN: https://ssrn.com/abstract=535842 or http://dx.doi.org/10.2139/ssrn.535842

Ryo Horii

Osaka University - Institute of Social and Economic Research ( email )

1-1 Yamadaoka
Suita, Osaka 565-0871
Japan
+81 6 6879 8552 (Phone)
+81 6 6879 8583 (Fax)

HOME PAGE: http://econ.jpn.org/horii/

Yoshiyasu Ono (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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