Funding Conditions, Asset Prices, and Macroeconomic Dynamics : Some U.S. Evidence

Funding liquidity, i.e., the ease with which firms, investors and consumers can obtain funding, is a key property of the monetary transmission mechanism. This paper is an empirical assessment of the role played by various measures of credit availability in shaping the dynamics of asset prices and the fluctuations of real activity in the US. We find that changes in funding conditions are more tightly associated with future asset valuations than with developments in key macroeconomic aggregates. This highlights some potentially destabilizing properties in recent liquidity cycles