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Endogenous Liquidity and Capital Reallocation

Cui, Wei; Wright, Randall; Zhu, Yu; (2024) Endogenous Liquidity and Capital Reallocation. Journal of Political Economy (In press).

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Abstract

We study economies where firms acquire capital in primary markets, then, after idiosyncratic productivity shocks, retrade it in secondary markets that incorporate bilateral trade with search, bargaining, and liquidity frictions. We distinguish 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 standard facts from the business cycle literature. We also investigate the impact of search frictions, monetary and fiscal policy, persistence in shocks, and returns to scale.

Type: Article
Title: Endogenous Liquidity and Capital Reallocation
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10188144
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