Asset Liquidity in Monetary Theory and Finance: A Unified Approach

Athanasios Geromichalos, Kuk Mo Jung (), Seungduck Lee () and Dilon Carl ()
Additional contact information
Kuk Mo Jung: Department of Economics, Sogang University, Seoul
Seungduck Lee: Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea
Dilon Carl: Department of Economics, University of California, Davis

No 1905, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: Economists often say that certain types of assets, e.g., Treasury bonds, are very ‘liquid’. Do they mean that these assets are likely to serve as media of exchange or collateral (a definition ofliquidityoftenemployedinmonetarytheory), orthattheycanbeeasilysoldinasecondary market, if needed (a definition of liquidity closer to the one adopted in finance)? We develop a model where these two notions of asset liquidity coexist, and their relative importance is determined endogenously in general equilibrium: how likely agents are to visit a secondary market in order to sell assets for money depends on whether sellers of goods/services accept these assets as means of payment. But, also, the incentive of sellers to invest in a technology that allows them to recognize and accept assets as means of payment depends on the exis- tence (and efficiency) of a secondary market where buyers could liquidate assets for cash. The interaction between these two channels offers new insights regarding the determination of asset prices and the ability of assets to facilitate transactions and improve welfare.

Keywords: Information; Over-the-Counter; Searchnd Matxhg; Liquidity; Asset prices; Monary policy (search for similar items in EconPapers)
JEL-codes: E40 E50 G11 G12 G14 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Asset Liquidity in Monetary Theory and Finance: A Unified Approach (2019)
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