The Welfare Effects of Liquidity Constraints

Tullio Jappelli () and Marco Pagano

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We analyze the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the economy is dynamically inefficient. But if it is dynamically efficient, some degree of financial repression is required to maximize steady-state utility, even though some generations are hurt in the transition. With endogenous technical progress, financial repression may increase welfare even along the transition path, thus leading to a Pareto improvement. In this case the optimal degree of financial repression increases as the economy grows.

Keywords: saving; liquidity constraints (search for similar items in EconPapers)
JEL-codes: E21 O16 (search for similar items in EconPapers)
Date: 1998-12-01
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (3)

Published in Oxford Economic Papers, April 1999, vol. 51, pages 410-430

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Related works:
Journal Article: The Welfare Effects of Liquidity Constraints (1999)
Working Paper: The Welfare Effects of Liquidity Constraints (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:13

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