Stock Market Liquidity and the Macroeconomy

Edited by Woon Gyu Choi and David Cook

in Monetary Policy with Very Low Inflation in the Pacific Rim

Published by University of Chicago Press

Published in print October 2006 | ISBN: 9780226378978
Published online February 2013 | e-ISBN: 9780226379012 | DOI:
Stock Market Liquidity and the Macroeconomy

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This chapter is concerned with the association between the liquidity of the Japanese stock market and the macroeconomy in a period of prolonged deflation, slow growth, and near-zero interest rates. During the 1990s, stock market liquidity fell, and the volatility of liquidity shocks increased. The exposure of individual firms' equity shares to liquidity shocks rose during the same period. An examination of money markets shows that a decline in stock market liquidity results in a rise in the demand for real money balances. Liquidity shocks affect the output in the real economy. The liquidity shocks to the stock market were linked with liquidity shocks in broader financial markets, including credit markets. Time-series evidence reveals that the large initial declines in liquidity occurred simultaneously with a wave of bankruptcies of Japanese financial intermediaries, including financial firms.

Keywords: stock market liquidity; Japanese stock market; macroeconomy; deflation; interest rates; liquidity shocks; money markets; financial markets

Chapter.  12677 words.  Illustrated.

Subjects: Business and Management

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