Dennis Fixler () and
Kimberly Zieschang ()
No WP022016, CEPA Working Papers Series from University of Queensland, School of Economics
An asset is liquid if its owner can trade it without incurring significant transaction cost. Thus, currency is liquid because it can be converted into goods or services, or other assets, due to its wide acceptance, at very low cost in time or value. By contrast, real estate is illiquid in most contexts because the transaction costs to convert it into other goods and services, or other assets, are relatively high. In modern economies, simply put, liquidity is the ability to meet financial obligations. On the supply side, banks provide financial instruments (deposit products) that allow agents to meet their obligations along with the additional services such as safekeeping and record keeping. Furthermore, there is a possibility of earning an interest income. On the demand side, Barnett (1978, 1980) showed by applying capital theory to financial assets that the liquidity of an asset to its holderâ€”the monetary services it yields or its â€œmoneynessâ€ â€”is indicated by the margin between the holderâ€™s cost of capitalâ€”a â€œbenchmarkâ€ rate of return on an asset yielding no monetary servicesâ€”and the total return on the asset (the rate of property income and expected holding gains, if any). This paper focuses on how economic statistics such as Gross Domestic Product (GDP) account for liquidity services in recording economic performance. We first examine the liquidity services provided by banks (depository institutions), and then broaden our analysis to the liquidity services produced by other enterprises. The paper also considers an alternative view of liquidity servicesâ€”as provided by the owners of financial assets for their own useâ€”rather than the prevailing approach in the national accountsâ€”as provided by financial institutions to other units in the economy.
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Journal Article: Producing liquidity (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uqcepa:112
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