Outside versus inside bonds: A ModiglianiâMiller type result for liquidity constrained economies

Aleksander Berentsen and Christopher Waller

Journal of Economic Theory, 2011, vol. 146, issue 5, 1852-1887

Abstract: When agents are liquidity constrained, two options exist â sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government (outside) bonds and in the other they can borrow by issuing (inside) bonds. All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.

Keywords: Liquidity; Financial; markets; Monetary; policy; Search (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (40)

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Related works:
Working Paper: Outside versus Inside Bonds: A Modigliani-Miller Type Result for Liquidity Constrained Economies (2010)
Working Paper: Outside versus inside bonds: a Modigliani-Miller type result for liquidity constrained economies (2009)
Working Paper: Outside versus inside bonds: A Modigliani-Miller type result for liquidity constrained economies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:5:p:1852-1887

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