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Liquidity and real equilibrium interest rates - a framework of analysis

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Author Info
Livio Stracca () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)

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Abstract

This paper proposes a general equilibrium model with heterogeneous households and a financial market where each financial instrument provides liquidity services in addition to enabling a transfer of purchasing power over time. Importantly, liquidity services may be asymmetric according to whether the financial instrument is held as an asset or as a liability, and are also agentspecific. The main purpose of the study is to develop an analytical framework and a language for evaluating the effect of (broadly defined) liquidity factors on equilibrium rates of return and intertemporal allocation.

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Paper provided by European Central Bank in its series Working Paper Series with number 542.

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Length: 27 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:ecb:ecbwps:20050542

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Related research
Keywords: Real interest rates liquidity services financial market heterogeneity.

Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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  6. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July. [Downloadable!] (restricted)
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  9. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June. [Downloadable!] (restricted)
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  10. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter. [Downloadable!] (restricted)
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