01915cas a2200253 a 4500 AALejournalIMF006524 230101c9999 xx r poo 0 0eng d 5.00 USD 9781455201242 1018-5941 BD-DhAAL BD-DhAAL Choi, Woon. Fire Sales and the Financial Accelerator / Woon Choi, David Cook. Washington, D.C. : International Monetary Fund, 2010. 1 online resource (29 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students During periods of financial turmoil, increases in risk lead to higher default, foreclosure, and fire sales. This paper introduces a costly liquidation process for foreclosed collateral and endogenous recovery rates in a dynamic stochastic general equilibrium model of the financial accelerator. Consistent with empirical evidence, we find that recovery rates are pro-cyclical when collateral is costly to liquidate. Through links between recovery rates, risk premia, and default risk, the model generates an additional liquidity spiral, a feedback loop for the financial accelerator. We illustrate how collateral liquidation and monetary policy alter the impacts of a financial shock. We also show that a government subsidy on collateral liquidity and the endogenous accumulation of liquidity inventory help dampen the liquidity spiral by shoring up recovery rates. Mode of access: Internet Cook, David. IMF Working Papers; Working Paper ; No. 2010/141 Full text available on IMF http://elibrary.imf.org/view/journals/001/2010/141/001.2010.issue-141-en.xml IMF e-Library