Transaction Asset Shortages

Abstract

Over the course of U.S. history there have been a small number of occasions in which aggregate nominal spending has declined, the most recent of which occurred during the recession that began in December 2007. Coincident with these observed declines in nominal spending are declines in the quantity of transaction assets and real output, where the former are defined as financial assets that also serve as a medium of exchange. We argue that the co-movement evident in the data is the result of transaction asset shortages. In particular, we develop a model in which transaction asset shortages result from shocks to the resalability, or liquidity, of privately produced assets. We estimate the model using Bayesian techniques. The estimated impulse response functions show evidence of the co-movement between nominal GDP, real GDP, and the supply of transaction assets that are known to occur during declines in aggregate nominal spending. We also show that the decline in nominal GDP that occurred in 2008 coincides with a large, sudden decline in the resalability of private assets.