We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distor...

Liquidity constraints can affect self-employment in a number of ways. They can prohibit potential entrepreneurs from starting up in business, they can restrict the growth of existing entrepreneurial activities and, in the extreme, they can result in small business failure. This paper uses British panel data to investigate the effects of relaxing liquidity constraints on selfemployment through t...

I study a theoretical model of life-cycle portfolio choice for an investor who has an option to invest in human capital but is liquidity constrained. I find that, since the young are more likely to exercise the option than the old, they are more concerned about liquidity risk (i.e. the risk that the liquidity constraint binds when it is optimal to invest). This, in turn, implies a hump-shaped p...

Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior. This paper provides the analytical basis for those interactions. First, we explain why the introduction of a liquidity constraint increases the precautionary s...

This document contains additional results for the paper “The Macroeconomics of Shadow Banking.” These results include robustness to alternative parameter values, evidence on the composition of the liquidity supply over the 2003–2015 cycle, and extensions for analyzing liquidity requirements and equity issuance costs. ∗Yale University School of Management, [email protected]. †New York Univer...

We study a financial model with one risk-free and one risky asset subject to liquidity risk and price impact. In this market, an investor may transfer funds between the two assets at any discrete time. Each purchase or sale policy decision affects the price of the risky asset and incurs some fixed transaction cost. The objective is to maximize the expected utility from terminal liquidation valu...

We consider an economy where people have the needs for liquidity because of the unanticipated consumption opportunity, yet banks may not provide su¢ cient liquidity due to imperfect technology in commitment, enforcement and record-keeping. We show a link between the liquidity generated by bank lending, the value of the asset used as collateral and aggregate economic activity. When the record-ke...

In this paper I quantify the effects of liquidity constraint and precautionary motive of savings in the framework of a stochastic dynamic general equilibrium model. I show that the Zeldes’s estimate [13] of the excess consumption growth for the low asset holders is consistent with the framework when the borrowing constraint point is three months’ worth of average wage income. A Monte Carlo test...