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The Economy in Perspective

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Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.
Samuel Taylor Coleridge - The Rime of the Ancient Mariner

Market liquidity dominates the financial news these days, and for good reason. Liquidity conditions influence the ability to execute financial transactions quickly and at prices that fairly approximate true value. In illiquid markets, trading takes more time, involves more risk, and becomes more expensive. Real economic activity can fall victim to illiquid financial markets if potential investors fear they will be unable to sell the securities they own at a reasonable price in the future. If enough investors pull back from a market, its ability to support economic activity is impaired.

Suggested citation: “The Economy in Perspective,” Federal Reserve Bank of Cleveland, Economic Trends, no. 98-11, pp. 01, 11.01.1998.

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