A NOTE ON LIQUIDITY AND REAL EQUILIBRIUM INTEREST RATES

Livio Stracca

Macroeconomic Dynamics, 2006, vol. 10, issue 3, 426-438

Abstract: This note proposes a general equilibrium model with heterogeneous households and a financial market where each financial instrument provides liquidity services in addition to enabling a transfer of purchasing power over time. Importantly, liquidity services may be asymmetric according to whether the financial instrument is held as an asset or as a liability, and are also agent-specific. The main purpose of the study is to develop an analytical framework and a language for evaluating the effect of (broadly defined) liquidity factors on equilibrium rates of return.

Date: 2006
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