Liquidity constraints in a monetary economy Articles uri icon

authors

  • FERRARIS, LEO
  • Watanabe, M

publication date

  • February 2012

start page

  • 255

end page

  • 277

issue

  • 1

volume

  • 53

International Standard Serial Number (ISSN)

  • 0020-6598

Electronic International Standard Serial Number (EISSN)

  • 1468-2354

abstract

  • This article presents a microfounded model of money with a consumption and an investment market. We consider an economy in which only part of the investment returns can be pledged. A liquidity constraint arises when the pledgeable part of the returns are not enough to pay for investment costs. We show that when the liquidity constraint is binding, agents may make a cash downpayment and money can perform two roles—as a provider of liquidity services and exchange services. The liquidity constraint constitutes a channel though which underinvestment occurs even at low inflation rates