Date of Award

2012

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Khemraj, Tarron

Keywords

Economics, Macroeconomics, Banking, Money

Area of Concentration

Economics

Abstract

In the years since the financial crisis in 2008, U.S. commercial banks have seen an unprecedented increase in liquidity preference. This thesis examines the relationship between bank liquidity preference and the business cycle. Shocks in bank liquidity preference are estimated and identified by considering the relationship between banks' total reserves and the loan rate and the federal funds rate. The thesis notes that a well-defined liquidity preference curve is evident in the credit market. Shifts in the curve represent shocks in bank liquidity preference. The purpose of this thesis is to measure the extent to which both negative and positive bank liquidity preference shocks affect unemployment, GDP, inflation, corporate profits after taxes, the stock market, and housing starts. The effects of bank liquidity preference shocks on many of these macroeconomic indicators were found to be economically significant, suggesting the importance of this bank behavior in the business cycle literature.

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