Liquidity and asset prices: A new monetarist approach

Ying-Syuan Li and Yiting Li ()

Journal of Monetary Economics, 2013, vol. 60, issue 4, 426-438

Abstract: When lenders cannot force borrowers to repay debts, assets are often pledged to secure loans. In this paper borrowers lose collateral once they renege on debts, and exclusion of defaulters occurs probabilistically, with a higher probability implying better enforcement. Increased efficiency in enforcement reduces asset prices, while raising loan-to-value ratios. If the rise in loan-to-value ratios is the dominant effect, aggregate liquidity and output increase with the advance in enforcement. Inflation raises the repayment cost by increasing the loan rate, while raising the default cost through exclusion. Consequently, inflation raises loan-to-value ratios and output only when enforcement is sufficiently efficient.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:60:y:2013:i:4:p:426-438

DOI: 10.1016/j.jmoneco.2013.04.005

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