LIQUIDITY AND INEFFICIENT INVESTMENT

Oliver Hart and Luigi Zingales

Journal of the European Economic Association, 2015, vol. 13, issue 5, 737-769

Abstract: We study consumer liquidity in a general equilibrium model where the friction is the nonpledgeability of future income. Liquidity helps to overcome the absence of a double coincidence of wants. Consumers over-hoard liquidity and the resulting competitive equilibrium is constrained inefficient. Fiscal policy following a large negative shock can increase ex-ante welfare. If the government cannot commit, the ex-post optimal fiscal policy will be too small from an ex-ante perspective. The model throws light on the holding of foreign reserves in international markets.

Date: 2015
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Working Paper: Liquidity and Inefficient Investment (2013)
Working Paper: Liquidity and Inefficient Investment (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jeurec:v:13:y:2015:i:5:p:737-769

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