Liquidity provision, interest rates, and unemployment

Guillaume Rocheteau and Antonio Rodriguez-Lopez ()

Journal of Monetary Economics, 2014, vol. 65, issue C, 80-101

Abstract: The effective liquidity supply of the economy—the weighted-sum of all assets that serve as media of exchange—matters for interest rates and unemployment. We formalize this idea by adding an over-the-counter market with collateralized trades to the Mortensen–Pissarides model. An increase in public liquidity through a higher supply of real government bonds raises the real interest rate, crowding out private liquidity and increasing unemployment. If unemployment is inefficiently high, keeping liquidity scarce can be socially optimal. A liquidity crisis affecting the acceptability of private assets as collateral widens the rate-of-return difference between private and public liquidity, also increasing unemployment.

Keywords: Unemployment; Liquidity; Interest rates (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (44)

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Working Paper: Liquidity Provision, Interest Rates, and Unemployment (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:65:y:2014:i:c:p:80-101

DOI: 10.1016/j.jmoneco.2014.04.006

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