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Money and Asset Liquidity in Frictional Capital Markets

Cui, W; Radde, S; (2016) Money and Asset Liquidity in Frictional Capital Markets. American Economic Review , 106 (5) pp. 496-502. 10.1257/aer.p20161078. Green open access

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Abstract

We endogenize asset liquidity and financing constraints in a dynamic general equilibrium model with search frictions on capital markets. Assets traded on frictional capital markets are only partially saleable. Liquid assets, such as fiat money, instead, are not subject to search frictions and can be used to insure idiosyncratic investment risks. Partially saleable assets thus carry a liquidity premium over fully liquid assets. We show that, in equilibrium, low asset saleability is typically associated with lower asset prices, tighter financing constraints, thus stronger demand for public liquidity. Lower asset liquidity feeds into real allocations, constraining real investment, consumption, and production.

Type: Article
Title: Money and Asset Liquidity in Frictional Capital Markets
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/aer.p20161078
Publisher version: http://dx.doi.org/10.1257/aer.p20161078
Language: English
Additional information: Copyright © 2016 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted. The author has the right to republish, post on servers, redistribute to lists and use any component of this work in other works. For others to do so requires prior specific permission and/or a fee. Permissions may be requested from the American Economic Association Administrative Office (https://www.aeaweb.org/contact).
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1493486
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