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A tractable model of indirect asset liquidity

Lucas Herrenbrueck and Athanasios Geromichalos

Journal of Economic Theory, 2017, vol. 168, issue C, 252-260

Abstract: Assets have “indirect liquidity” if they cannot be used as media of exchange, but can be traded to obtain a medium of exchange (money) and thereby inherit monetary properties. This essay describes a simple dynamic model of indirect asset liquidity, provides closed form solutions for real and nominal assets, and discusses properties of the solutions. Some of these are standard: assets and money are imperfect substitutes, asset demand curves slope down, and money is not always neutral. Other properties are more surprising: prices are flexible but appear sticky, and an increase in the supply of indirectly liquid assets can decrease welfare. Because of its simplicity, the model can be useful as a building block inside a larger model, and for teaching concepts from monetary theory.

Keywords: Monetary-search models; Asset liquidity; Asset prices; Monetary policy; Monetary aggregates (search for similar items in EconPapers)
JEL-codes: E41 E51 E52 G12 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: A Tractable Model of Indirect Asset Liquidity (2015) Downloads
Working Paper: A Tractable Model of Indirect Asset Liquidity (2015) Downloads
Working Paper: A Tractable Model of Indirect Asset Liquidity (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:168:y:2017:i:c:p:252-260

DOI: 10.1016/j.jet.2016.12.009

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