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On the optimal supply of liquidity with borrowing constraints

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  • Lippi, Francesco
  • Trachter, Nicholas

Abstract

We characterize policies for the supply of liquidity in an economy where agents have a precautionary savings motive due to random production opportunities and the presence of borrowing constraints. We show that a socially efficient provision of liquidity involves a trade-off between insurance and production incentives. Two scenarios are studied: if no aggregate information is available to the policy maker, constant flat expansions are socially beneficial if unproductive spells are sufficiently long. If some aggregate information is available, a socially beneficial state-dependent policy prescribes expanding the supply of liquidity in recessions and contracting it in expansions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8890.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8890

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Related research

Keywords: Friedman rule; Heterogenous agents; Incomplete markets; Liquidity; Precautionary savings; State dependent policy.;

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