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Liquidity Preference and Financial Intermediation

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  • Dutta, Jayasri
  • Kapur, Sandeep

Abstract

The authors examine the characteristics of optimal monetary policies in a general equilibrium model with incomplete markets. Markets are incomplete because of uninsured preference uncertainty and because productive capital is traded infrequently. Rational individuals are willing to hold a liquid asset--'money'--at a premium. Monetary policy interacts with existing financial institutions to determine this premium, as well as the level of precautionary holdings. The authors show that inflation is expansionary and that the optimal inflation rate is positive if there is no operative banking system (the Tobin effect). Otherwise, efficiency requires that money be undominated in its rate of return. Copyright 1998 by The Review of Economic Studies Limited.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 65 (1998)
Issue (Month): 3 (July)
Pages: 551-72

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Handle: RePEc:bla:restud:v:65:y:1998:i:3:p:551-72

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Cited by:
  1. POLEMARCHAKIS, Heracles M. & ROCHON, Céline, 1999. "Debt, liquidity and dynamics," CORE Discussion Papers 1999034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Teles, Pedro & Uhlig, Harald, 2010. "Is Quantity Theory Still Alive?," CEPR Discussion Papers 8049, C.E.P.R. Discussion Papers.
  3. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal Monetary Policy and Economic Growth," Staff General Research Papers 12413, Iowa State University, Department of Economics.
  4. Samartín Sáenz, Margarita, 2001. "Banks increase welfare," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/7603, Universidad Carlos III de Madrid.
  5. Ioannis Lazopoulos, 2005. "Cycles And Banking Crisis," Money Macro and Finance (MMF) Research Group Conference 2005 15, Money Macro and Finance Research Group.
  6. Margarita Samartín, 2004. "Algunos Temas Relevantes En La Teoría Bancaria," Documentos de Trabajo de Economía de la Empresa db040403, Universidad Carlos III, Departamento de Economía de la Empresa.
  7. Dutta, J. & Kapur, S., 2000. "Default and Efficient Debt Markets," Discussion Papers 00-14, Department of Economics, University of Birmingham.

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