LIQUIDITY CONSTRAINTS IN A MONETARY ECONOMY

Leo Ferraris () and Makoto Watanabe

International Economic Review, 2012, vol. 53, issue 1, 255-277

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.

Date: 2012
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https://doi.org/10.1111/j.1468-2354.2011.00679.x

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