This article presents a microfounded model of money with a consumption and an investment market. We consider an economy in which only part of the investment returns can be pledged. A liquidity constraint arises when the pledgeable part of the returns are not enough to pay for investment costs. We show that when the liquidity constraint is binding, agents may make a cash downpayment and money can perform two roles—as a provider of liquidity services and exchange services. The liquidity constraint constitutes a channel though which underinvestment occurs even at low inflation rates.
Ferraris, L., Watanabe, M. (2012). Liquidity constraints in a monetary economy. INTERNATIONAL ECONOMIC REVIEW, 53(1), 255-277 [10.1111/j.1468-2354.2011.00679.x].
Liquidity constraints in a monetary economy
FERRARIS, LEO;
2012-01-01
Abstract
This article presents a microfounded model of money with a consumption and an investment market. We consider an economy in which only part of the investment returns can be pledged. A liquidity constraint arises when the pledgeable part of the returns are not enough to pay for investment costs. We show that when the liquidity constraint is binding, agents may make a cash downpayment and money can perform two roles—as a provider of liquidity services and exchange services. The liquidity constraint constitutes a channel though which underinvestment occurs even at low inflation rates.| File | Dimensione | Formato | |
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