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A Discussion By Maxim Nikitin

Liquidity Effects on Asset Prices, Financial Stability and Economic Resilience by D. Tsomocos and J.F. Martinez. A Discussion By Maxim Nikitin. The Main Idea of the Paper:. A dynamic stochastic general equilibrium model with endogenous liquidity and endogenous default

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A Discussion By Maxim Nikitin

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  1. Liquidity Effects on Asset Prices,Financial Stability and Economic Resilience by D. Tsomocos and J.F. Martinez A Discussion By Maxim Nikitin

  2. The Main Idea of the Paper: • A dynamic stochastic general equilibrium model with endogenous liquidity and endogenous default • The main motivation: standard DSGE models abstract from endogenous default and do not allow for sudden shortages of liquidity that are so important in propagation of financial crises

  3. Valuable Contribution, because • DSGE models used by central banks were developed during the “Great Moderation” when financial crises in major developed countries seemed no longer relevant (if not impossible).

  4. A Negative Monetary Policy Shock • Raises interest rate and reduces the amount of liquidity in the system • Lowers the marginal cost of default • Increases the equilibrium level of default

  5. However, it is hard to discuss the paper, because: The paper is a part a ‘multi-paper’ project, that Dimitrios is working on, the papers use similar framework, but the space limitations of a single paper do not allow him and his coauthor to present all the essential elements of the model and solution.

  6. What can be done? • Have a complete version of the paper somewhere on the web (100+ pages, or whatever), that a person not familiar with their earlier works can read and understand. • Or write a book

  7. Questions • Is this a “crisis-only” model, or is it descriptive model of the economy in both, tranquil and crisis times? • What are the shocks that cause financial crises? • What is the optimal policy (monetary and regulatory) response to these shocks?

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