Events

Economics Seminar

Authors:

• John Driffill
  Bickeck College, London

• Marcus Miller
  University of Warwick

How and why do financial conditions matter for real outcomes? The ‘workhorse model of money and liquidity' of Kiyotaki and Moore (2008) shows how a ‘Big Bang' enhancement of liquidity can stimulate investment and future aggregate supply, with full employment maintained by flexible prices. But an unexpected contraction of liquidity – though temporary – can lead to Keynesian demand failure if the flex-price assumption is dropped for goods and labour markets in excess supply. The ‘bootstrap' property of ‘regime-switching' models implies that the duration of this recession depends on expectations. Capital depletion during the recession may cause a supply bottleneck when liquidity is restored.