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The Welfare Effects of Liquidity Constraints

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  • Jappelli, Tullio
  • Pagano, Marco

Abstract

We analyse 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 optimal in the steady state, even though it hurts some generations in the transition. In an open economy with capital mobility, financial repression of domestic households is never optimal at the national level; but generalized capital mobility leads to an inefficiently low steady-state supply of saving at the world level. 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1108.

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Date of creation: Jan 1995
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Handle: RePEc:cpr:ceprdp:1108

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Keywords: Liquidity Constraints; Saving; Welfare;

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References

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  1. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  2. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  3. Bencivenga, V.R. & Smith, B.D., 1990. "Deficits, Inflation, And The Banking System In Developing Countries: The Optimal Degree Of Financial Repression," RCER Working Papers 214, University of Rochester - Center for Economic Research (RCER).
  4. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
  5. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. Michael B. Devereux & Gregor W. Smith, 1991. "International Risk Sharing and Economic Growth," Working Papers 829, Queen's University, Department of Economics.
  8. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  9. Azariadis, Costas & Reichlin, Pietro, 1996. "Increasing returns and crowding out," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 847-877, May.
  10. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  11. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
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Citations

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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. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report 203, Federal Reserve Bank of Minneapolis.
  3. 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.
  4. 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.
  5. Berthold U. Wigger, 2000. "Pareto-Improving Intergenerational Transfers," CESifo Working Paper Series 285, CESifo Group Munich.
  6. 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.
  7. 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.
  8. 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.
  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. 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.

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