Liquidity and the International Allocation of Economic Activity

Antonio Rodriguez‐Lopez

International Economic Review, 2021, vol. 62, issue 2, 789-830

Abstract: I present a model to study the linkages between the market for liquidity and the international allocation of economic activity. Private assets' liquidity properties affect interest rates, with consequences on entry, production, and market capitalization. In a closed economy, the liquidity market increases the size and productivity of the sector that generates liquid assets. In an open economy, cross‐country differences in financial development generate an allocation of economic activity favoring the country supplying the most liquid assets. Supporting the theory, I show that asset acceptability as collateral is negatively correlated with yields, and positively correlated with measures of economic activity.

Date: 2021
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