Using AM and RI to get phase diagram

q

Equity Price

K

AM

E

Capital Stock

RI

K*

Asset price stationary

Δq/Δt = 0

Zero net investment

ΔK/Δt = 0

SU

U

S

q

K

EE'

P

RI

RI'

AMAM'

K*K**

P

I

liquidity shock shifts E to E': with stock market fall leading to recession

Diagram 1. Effect of a stochastic liquidity shock in US that lasts 10 quarters, official simulations and our analytical equivalent.

Y

t

q

Equity Price

K

AM

E

Capital Stock

RI

S

U

K*

K Zero net investment

ΔK/Δt = 0

Asset price stationary

Δq/Δt = 0 U

S

Using AM and RI to get phase diagram

liquidity shock shifts E to E': with stock market fall leading to recession – or recovery if shock is to be

reversed

q

K

E

K**

D

K*

E'

I

P

RI

RI'

AMAM'