Precautionary Saving and Liquidity Shortage

Most of the canonical macroeconomic models simulate liquidity anomalies by changing economic fundamentals or adding massive financial shock to firms’ collateral constraints, but a few facts somehow tell different story. Instead relying on exogenous shocks, we introduce uncertainty into an otherwise classical framework and try answer what worsens aggregate in absence simulations firm dynamics financing strategy would be. Our analysis shows that (1) induces agents make decisions under worst-case scenario hence generates unique expectation threshold drags market (or firms) from sufficiency insufficiency even without any changes. (2) Precautionary saving occurs before real shortage as shifts, causing firms secure external raising equity issuing price hoarding liquid assets, such fiat money, against tightening. (3) To achieve stability sustainability, extra mathematical constraint is supplemented for uniqueness existence equilibrium uncertainty. Other properties intertemporal allocations, bid-ask spread return holding illiquid asset, are derived. Moreover, some approaches further empirical research discussed.