Payments, Liquidity Preferences, and Economic Fluctuations
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| Title | Payments, Liquidity Preferences, and Economic Fluctuations
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| Author | Liu Fengliang,Zhang Xiaomeng and Yu Ze |
| Organization | Renmin University of China, RUC |
| Email | flliu@ruc.edu.cn；xmz@ruc.edu.cn；yuzeruc@163.com |
| Key Words | Payment; Liquidity; Bank Theory; Monetary Policy; Economic Fluctuations |
| Abstract | The recent global financial crisis has highlighted the importance of liquidity. With the rising share of non-cash payment, the effect of liquidity shocks may be further amplified. In this paper, we include bank intermediation into the business cycle framework, investigating the impacts of liquidity shock and payment shock. Furthermore, we discuss how these conclusions alter when the proportion of non-cash payment increases. Based on our theoretical analysis and numerical simulations, we find that the liquidity shock and payment shock can lead to business cycles, credit market fluctuations and rising risk level through the household’s liquidity constraint, the firm’s credit constraint, the bank’s liquidity management and balance sheet constraint. After the proportion of non-cash payment increases, these fluctuations will be further amplified, resulting in an important source of risk. These results imply that we need to be more cautious with respect to the macro risk, strengthen the macro-prudential management, and design a more coordinated payment system under the monetary policy framework. |
| Serial Number | WP1127 |
| Time | 2016-11-04 |
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