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Payments and liquidity under adverse selection

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  • Rocheteau, Guillaume

Abstract

Informational asymmetries regarding the future value of assets affect their role in exchange. I construct a random-matching economy composed of two assets: a risk-free bond and a Lucas tree whose terminal value is privately known to its holder. No restrictions are imposed on payment arrangements. The main finding supports a pecking-order theory of payments: Agents use their risk-free bonds first in order to finance their spending shocks, and they use their information-sensitive assets only if their holdings of bonds are depleted. The theory has implications for the optimal provision of risk-free bonds, the structure of asset returns, and liquidity.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 3 ()
Pages: 191-205

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Handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:191-205

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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Citations

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Cited by:
  1. Nosal, Ed & Rocheteau, Guillaume, 2013. "Pairwise trade, asset prices, and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 1-17.
  2. Randall Wright & Guillaume Rocheteau, 2011. "Liquidity and Asset Market Dynamics," 2011 Meeting Papers 103, Society for Economic Dynamics.
  3. Zachary Bethune & Guillaume Rocheteau & Peter Rupert, . "Aggregate Unemployment and Household Unsecured Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  4. Athanasios Geromichalos & Lucas Herrenbrueck & Kevin Salyer, 2013. "A Search-Theoretic Model of the Term Premium," Working Papers 138, University of California, Davis, Department of Economics.
  5. David Andolfatto & Aleksander Berentsen & Christopher J. Waller, 2013. "Monetary policy with asset-backed money," Working Papers 2013-030, Federal Reserve Bank of St. Louis.
  6. Hu, Tai-Wei & Rocheteau, Guillaume, 2013. "On the coexistence of money and higher-return assets and its social role," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2520-2560.
  7. Guillaume Rocheteau & Jose Antonio Rodriguez-Lopez, 2013. "Liquidity Provision, Interest Rates, and Unemployment," Working Papers 121311, University of California-Irvine, Department of Economics.
  8. Chao Gu & Joseph Haslag, 2014. "Unconventional Optimal Open Market Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 543-558, July.
  9. Aleksander Berentsen & Michael McBride & Guillaume Rocheteau, 2013. "Limelight on dark markets: an experimental study of liquidity and information," ECON - Working Papers, Department of Economics - University of Zurich 126, Department of Economics - University of Zurich.
  10. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(4), pages 426-438.
  11. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series, Federal Reserve Bank of Chicago WP-2014-4, Federal Reserve Bank of Chicago.
  12. Martin Meier & Burkhard Schipper, 2013. "Bayesian Games with Unawareness and Unawareness Perfection," Working Papers 139, University of California, Davis, Department of Economics.
  13. Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.

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