Structural liquidity: Time coordination of economic activities and sectoral interdependence

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• Ivano Cardinale (Emmanuel College), Roberto Scazzieri (University of Bologna and Gonville and Caius College)
• Tuesday 05 February 2013, 17:00-18:00
• Barbara White Room, Newnham College.

If you have a question about this talk, please contact Sheryl Anderson.

Investigating the links between the financial and real spheres of the economy is especially relevant during crises. In this paper we concentrate on how liquidity impacts the real economy. Such impact is usually discussed in terms of microeconomic decision making (liquidity as a feature of portfolio management) and macroeconomic policy making (liquidity provision as an outcome of policy choice). What is generally missing is the analysis of liquidity mechanisms at intermediate levels of aggregation. Yet it is at the level of the interdependencies between economic sectors that liquidity arrangements are of central importance in determining the overall performance of any given economic system. This paper outlines a conceptual framework for structural liquidity analysis with the aim of overcoming the micro-macro divide. The strategy of the paper is as follows. First, we call attention to liquidity as a feature of the relationships between economic sectors: economic systems are more or less liquid depending on the degree of flexibility between sectors that the system’s architecture allows. Second, we emphasize that different sectors have different liquidity requirements (short-term versus long-term liquidity) depending upon the composition of their respective capital stocks (as expressed by the relationship between fixed and circulating capital). Finally, we draw some political-economic implications of our framework. As a result of their liquidity requirements, different sectors might have different interests in terms of the liquidity policies adopted by national or supranational authorities. This suggests another route to explaining the formation of decisions concerning liquidity in an economy – one that is based on the patterns of interdependencies among sectors and asymmetries in the composition of capital stocks.

This talk is part of the Cambridge Finance Workshop Series series.

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