UNDERSTANDING THE MACROECONOMIC IMPACT OF ILLIQUIDITY SHOCKS IN THE UNITED STATES

Chia Yi Yen, Yu Hsi Chou

Research output: Contribution to journalArticle

Abstract

In this paper, we empirically investigate the role of stock market illiquidity shocks, stemming from Amihud's illiquidity measure, in explaining U.S. macroeconomic fluctuations from 1973 to 2018. We find that the impact of illiquidity shocks on economic activity is substantial, and historical decomposition analysis shows that cumulative illiquidity shocks were an essential contributor to the prolonged economic slump of the Great Recession. Moreover, our identified illiquidity shocks represent a distinct source of macroeconomic instability. This suggests that illiquidity shocks, measured by the stock price impacts, may contain more information than other types of shocks in recent studies, such as financial shocks and uncertainty shocks. (JEL C32, E32).

Original languageEnglish
Pages (from-to)1245-1278
Number of pages34
JournalEconomic Inquiry
Volume58
Issue number3
DOIs
Publication statusAccepted/In press - 2020 Jan 1

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics

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