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ABSTRACT:
This paper develops a macroeconomic model in which investable assets flow to entrepreneurs through long-term relationships with lenders. Low asset flows cause relationships to brak up due to insufficient liquidity. Multiple Pareto ranked steady staes emerge from complementarity between financial intermediation, reflected by the number of relationships, and households' incentives to provide assets. This complementarity also serves as a mechanism for propagating aggregate shocks. Financial colapse may become inescapable if a shock destorys sufficiently many relationships.

SUGGESTED CITATION:
Wouter J. den Haan, Garey Ramey, and Joel Watson, "Liquidity Flows and Fragility of business Enterprises" (December 1, 2000). Department of Economics, UCSD. Paper 99-07R.
http://repositories.cdlib.org/ucsdecon/99-07R