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The Welfare Effects of Liquidity Constraints

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  • Jappelli, Tullio
  • Pagano, Marco

Abstract

The authors analyze the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the economy is dynamically inefficient. But, if it is dynamically efficient, some degree of financial repression is required to maximize steady-state utility, even though some generations are hurt in the transition. With endogenous technical progress, financial repression may increase welfare even along the transition path, thus leading to a Pareto improvement. In this case, the optimal degree of financial repression increases as the economy grows. Copyright 1999 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 51 (1999)
Issue (Month): 3 (July)
Pages: 410-30

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Handle: RePEc:oup:oxecpp:v:51:y:1999:i:3:p:410-30

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  1. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  2. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
  3. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
  4. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February.
  5. Devereux, Michael B & Smith, Gregor W, 1994. "International Risk Sharing and Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-50, August.
  6. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  7. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-90, October.
  8. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  9. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  10. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
  11. Azariadis, Costas & Reichlin, Pietro, 1996. "Increasing returns and crowding out," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 847-877, May.
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Cited by:
  1. S. Rao Aiyagari & Ellen R. McGrattan, 2003. "The Optimum Quantity of Debt: Technical Appendix," Annals of Economics and Finance, Society for AEF, vol. 4(1), pages 193-217, May.
  2. L. Deidda, 2000. "On the real effects of financial development," Working Paper CRENoS 200010, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  3. Berthold U. Wigger, 2000. "Pareto-Improving Intergenerational Transfers," CESifo Working Paper Series 285, CESifo Group Munich.
  4. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
  5. Papagni, Erasmo, 2008. "The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving and Growth," MPRA Paper 12793, University Library of Munich, Germany.
  6. Luca Casolaro & Leonardo Gambacorta & Luigi Guiso, 2005. "Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy," Temi di discussione (Economic working papers) 560, Bank of Italy, Economic Research and International Relations Area.
  7. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
  8. L. Deidda & F. Cerina, 2002. "Do we need more time for leisure?," Working Paper CRENoS 200203, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  9. J. Manrique & K. Ojah, 2004. "Credits and non-interest rate determinants of loan demand: a Spanish case study," Applied Economics, Taylor & Francis Journals, vol. 36(8), pages 781-791.
  10. von Furstenberg, George M., 2004. "The Contribution of Rapid Financial Development to Asymmetric Growth of Manufacturing Industries: Common Claims vs. Evidence for Poland," Discussion Paper Series 1: Economic Studies 2004,34, Deutsche Bundesbank, Research Centre.

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