Transaction Asset Shortages

Over the course of U.S. history there have been a number of occasions in which aggregate nominal spending has declined, the most recent of which occurred during the recession that began in December 2007. Coincident with these observed declines in nominal spending is a corresponding decline in the quantity of transaction assets and real output, where the former are defined as financial assets that also serve as a medium of exchange. This paper argues that the co-movement evident in the data is the result of transaction asset shortages. In particular, the paper employs a theoretical model in which transaction asset shortages result from shocks to the resalability, or liquidity of privately produced assets. A structural VAR model is then used to examine the effects of these shocks to determine whether they are consistent with the hypothesized effects in the model. Finally, the VAR is used to construct a historical decomposition of the recession that began in 2007 in the United States in order to examine the relative importance of resalability shocks. The results lend support to the hypothesis of a transaction asset shortage.