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THE EFFECTS OF NEWS WHEN LIQUIDITY MATTERS
Author(s) -
Gu Chao,
Han Han,
Wright Randall
Publication year - 2020
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12473
Subject(s) - monetary economics , monetary policy , economics , market liquidity , bust , volatility (finance) , collateral , inflation (cosmology) , boom , financial economics , finance , physics , environmental engineering , theoretical physics , engineering
We analyze the impact of news (information shocks) in economies where liquidity matters, including those with endogenous credit limits, and those with assets serving as collateral or media of exchange. Although we also consider news about productivity and credit conditions, a leading case concerns monetary policy announcements. Real or monetary news has big effects on markets, potentially causing cyclic or boom–bust responses, even though we focus on the unique transition consistent with stationarity after shocks. In particular, policy announcements may induce instead of reduce volatility. We also discuss the implications for the inflation puzzle, forward‐guidance puzzle, and other apparent anomalies.