Advanced Search
MyIDEAS: Login to save this article or follow this journal

Payments and liquidity under adverse selection

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0304393211000602
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

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

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

as in new window
Handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:191-205

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. S. Boragan Aruoba & Randall Wright, 2002. "Search, money and capital: a neoclassical dichotomy," Working Paper 0208, Federal Reserve Bank of Cleveland.
  2. Irina A. Telyukova & Randall Wright, 2008. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 629-647.
  3. Huggett, Mark & Krasa, Stefan, 1996. "Money and Storage in a Differential Information Economy," Economic Theory, Springer, vol. 8(2), pages 191-210, August.
  4. Guillaume Rocheteau, 2008. "Money and competing assets under private information," Working Paper 0802, Federal Reserve Bank of Cleveland.
  5. Li, Yiting, 1995. "Commodity money under private information," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 573-592, December.
  6. François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January.
  7. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
  8. S. Boragan Aruoba & Randall Wright, 2002. "Search, Money and Capital: A Neoclassical Dichotomy, Second Version," PIER Working Paper Archive 03-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2003.
  9. Edward J. Green & Warren Weber, 1996. "Will the New $100 Bill Decrease Counterfeiting?," Macroeconomics 9609003, EconWPA, revised 11 Sep 1996.
  10. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  11. Guillaume Rocheteau & Ricardo Lagos, 2008. "Liquidity in asset markets with search frictions," Working Paper 0804, Federal Reserve Bank of Cleveland.
  12. Cuadras-Morato, Xavier, 1994. "Commodity Money in the Presence of Goods of Heterogeneous Quality," Economic Theory, Springer, vol. 4(4), pages 579-91, May.
  13. Williamson, S. & Wright, R., 1991. "Barter and Monetary Exchange Under Private Information," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9107, University of Western Ontario, The Centre for the Study of International Economic Relations.
  14. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 915-944, October.
  15. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2001. "Cigarette Money," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 117-142, July.
  16. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
  17. Ricardo Lagos, 2010. "Asset prices, liquidity, and monetary policy in the search theory of money," Quarterly Review, Federal Reserve Bank of Minneapolis, issue July, pages 14-20.
  18. Jafarey, Saqib & Rupert, Peter, 2001. "Limited Commitment, Money, and Credit," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 22-58, July.
  19. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  20. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  21. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  22. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  23. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
  24. Ricardo Lagos & Guillaume Rocheteau, 2004. "Money and capital as competing media of exchange," Staff Report 341, Federal Reserve Bank of Minneapolis.
  25. S. Rao Aiyagari, 1989. "Gresham's Law in a Lemons Market for Assets," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 686-97, August.
  26. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  27. Athanasios Geromichalos & Juan M Licari & Jose Suarez-Lledo, 2007. "Monetary Policy and Asset Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 761-779, October.
  28. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  29. Hopenhayn, Hugo A. & Werner, Ingrid M., 1996. "Information, Liquidity, and Asset Trading in a Random Matching Game," Journal of Economic Theory, Elsevier, vol. 68(2), pages 349-379, February.
  30. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November.
  31. B. Ravikumar & Enchuan Shao, 2005. "Search Frictions and Asset Price Volatility," 2005 Meeting Papers 227, Society for Economic Dynamics.
  32. Guillaume Plantin, 2009. "Learning by Holding and Liquidity," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 395-412.
  33. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  34. Banerjee, Abhijit V & Maskin, Eric S, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 955-1005, November.
  35. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2011. "Information and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 355-377, October.
  36. Nosal, Ed & Wallace, Neil, 2007. "A model of (the threat of) counterfeiting," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 994-1001, May.
  37. Alberto Trejos, 1997. "Incentives to produce quality and the liquidity of money (*)," Economic Theory, Springer, vol. 9(2), pages 355-365.
  38. Annette Vissing-Jorgensen & Arvind Krishnamurthy, 2008. "The Aggregate Demand for Treasury Debt," 2008 Meeting Papers 713, Society for Economic Dynamics.
  39. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper 0901, Federal Reserve Bank of Cleveland.
  40. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  41. Robert Shimer & Randall Wright & Veronica Guerrieri, 2009. "Adverse Selection in Competitive Search Equilibrium," 2009 Meeting Papers 139, Society for Economic Dynamics.
  42. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  43. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  44. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
  45. Trejos, Alberto, 1999. "Search, Bargaining, Money, and Prices under Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 679-95, August.
  46. Rubinstein, Ariel, 1985. "A Bargaining Model with Incomplete Information about Time Preferences," Econometrica, Econometric Society, vol. 53(5), pages 1151-72, September.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. David Andolfatto & Aleksander Berentsen & Christopher J. Waller, 2013. "Monetary policy with asset-backed money," Working Papers 2013-030, Federal Reserve Bank of St. Louis.
  3. 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.
  4. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 426-438.
  5. Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.
  6. Guillaume Rocheteau & Jose Antonio Rodriguez-Lopez, 2013. "Liquidity Provision, Interest Rates, and Unemployment," Working Papers 121311, University of California-Irvine, Department of Economics.
  7. 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.
  8. Rocheteau, Guillaume & Wright, Randall, 2013. "Liquidity and asset-market dynamics," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 275-294.
  9. Martin Meier & Burkhard Schipper, 2012. "Bayesian Games with Unawareness and Unawareness Perfection," Working Papers 129, University of California, Davis, Department of Economics.
  10. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series WP-2014-4, Federal Reserve Bank of Chicago.
  11. 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.
  12. Aleksander Berentsen & Michael McBride & Guillaume Rocheteau, 2013. "Limelight on dark markets: an experimental study of liquidity and information," ECON - Working Papers 126, Department of Economics - University of Zurich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:191-205. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.