The optimal quantity of money and partially-liquid assets

Ugo Zannini

Journal of Economic Theory, 2020, vol. 188, issue C

Abstract: In a monetary economy à la Williamson (2012), in which a competitive financial sector insures agents facing idiosyncratic liquidity risk on interest-bearing assets, we introduce a competitive market for liquidity reallocation and study optimal policy. We show that, at any inflation rate above the Friedman rule, the market is a welfare-improving risk-sharing mechanism over Williamson's (2012) deposit contract. The optimal policy requires real asset scarcity, which increases the demand for money, and shrinks consumption inequality between asset and money users. Also, we demonstrate that the equilibrium deposit contract with re-trading opportunities in the asset market replicates the market allocations.

Keywords: Asset market; Financial intermediation; Liquidity effect; Monetary policy; Risk sharing (search for similar items in EconPapers)
JEL-codes: E41 E43 E44 E52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:188:y:2020:i:c:s0022053118304009

DOI: 10.1016/j.jet.2020.105034

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