The recent ongoing financial crisis has provided a sharp reminder that the macroeconomy can be plagued by uncertainty and instability that are poorly captured by mainstream macroeconomic models. Flaws in financial markets can affect the real sector, but this has been largely ignored. This project challenges established neoclassical theory. Practical business people recognize that there are financial market imperfections, but many standard models, especially in macroeconomics, ignore these financial market flaws. Even in mainstream models that allow for financial constraints, corporate savings (and corporate cash holdings) are ruled out by assumption. It is only recently that the first dynamic structural models of corporate liquidity have been proposed. The empirical approach of this project is also radically innovative. The robust nonparametric technique flows directly from the researchers’ model in which the distribution of the key variables is non-normal.
The Marginal Value of Cash and the Great Depression