Endogenous Procyclical Liquidity, Capital Reallocation, and q
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Authors
Cao, Melanie
Shi, Shouyong
Date
2022-06-27
Type
journal article
Language
en
Keyword
Endogenous liquidity , Capital reallocation , Search
Alternative Title
Abstract
Capital reallocation is procyclical and an economic boom has a cleansing effect by shifting the distribution of firms from low quality to high quality. We explain these facts by modeling search frictions for used capital in the business cycle. The article characterizes the stochastic equilibrium analytically to prove that the liquidity and the price of reallocated capital are procyclical endogenously. We calibrate the model and construct proxies in the data for the unemployment rate of capital and the time on the market. These two variables have a strong positive relationship in both the model and the data.
Description
This is the peer reviewed version of the following article: Cao, M. and Shi, S. (2022), Endogenous Procyclical Liquidity, Capital Reallocation, and q. International Economic Review, which has been published in final form at https://doi.org/10.1111/iere.12594. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
Citation
Cao, M. and Shi, S. (2022), Endogenous Procyclical Liquidity, Capital Reallocation, and q. International Economic Review. https://doi.org/10.1111/iere.12594
Publisher
Wiley