Liquidity Provision, Interest Rates, and Unemployment
AbstractThis paper develops a model of the public and private provision of liquidity and its relation to unemployment. We extend the Mortensen-Pissarides model of the labor market by adding an over-the-counter (OTC) market. Trades in the OTC market are collateralized with liquid assets, which are created through the financing of firms and by some public entity. As a result, the real interest rate is endogenous and depends on the financing needs of firms, the liquidity needs of OTC-traders, and the public supply of liquidity. We show that under some conditions the policymaker faces a trade-off between the provision of liquidity to the OTC market and the need to keep the cost of financing firms low. When the unemployment is inefficiently high, it is optimal to keep liquidity scarce, thereby reducing the total surplus of OTC-traders, to lower interest rates and promote job creations. We study the dynamics of the labor market under a liquidity shortage and we introduce heterogeneity across private assets in order to illustrate how a shock to liquidity demand can generate collateral expansion.
Download InfoIf 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.
Bibliographic InfoPaper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 121311.
Length: 49 pages
Date of creation: Jun 2013
Date of revision:
Unemployment; Liquidity; Interest rates;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-30 (All new papers)
- NEP-DGE-2013-06-30 (Dynamic General Equilibrium)
- NEP-MST-2013-06-30 (Market Microstructure)
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.:
- Cooley, Thomas F. & Quadrini, Vincenzo, 2004. "Optimal monetary policy in a Phillips-curve world," Journal of Economic Theory, Elsevier, vol. 118(2), pages 174-208, October.
- Rocheteau, Guillaume, 2011. "Payments and liquidity under adverse selection," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 191-205.
- Giglio, Stefano & Severo, Tiago, 2012.
"Intangible capital, relative asset shortages and bubbles,"
Journal of Monetary Economics,
Elsevier, vol. 59(3), pages 303-317.
- Stefano Giglio & Tiago Severo, 2011. "Intangible Capital, Relative Asset Shortages and Bubbles," Levine's Working Paper Archive 786969000000000121, David K. Levine.
- Stefano Giglio & Tiago Severo, 2011. "Intangible Capital, Relative Asset Shortages and Bubbles," IMF Working Papers 11/271, International Monetary Fund.
- Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
- Pierre-Olivier Weill, 2007.
"Leaning Against the Wind,"
Review of Economic Studies,
Oxford University Press, vol. 74(4), pages 1329-1354.
- Bengt Holmstrom & Jean Tirole, 1998.
"Private and Public Supply of Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 106(1), pages 1-40, February.
- Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
- Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- Pagnotta, Emiliano & Philippon, Thomas, 2012.
"Competing on Speed,"
CEPR Discussion Papers
8786, C.E.P.R. Discussion Papers.
- C Bean & Christopher A. Pissarides, 1992.
"Unemployment, Consumption and Growth,"
CEP Discussion Papers
dp0100, Centre for Economic Performance, LSE.
- Aleksander Berentsen & Guido Menzio & Randall Wright, 2009.
"Inflation and Unemployment in the Long Run,"
Kiel Working Papers
1501, Kiel Institute for the World Economy.
- Randall Wright & Guido Menzio & Aleksander Berentsen, 2008. "Inflation and Unemployment in the Long Run," 2008 Meeting Papers 34, Society for Economic Dynamics.
- Aleksander Berentsen & Guido Menzio & Randall Wright, 2008. "Inflation and Unemployment in the Long Run," PIER Working Paper Archive 08-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Aleksander Berentsen & Guido Menzio & Randall Wright, 2008. "Inflation and Unemployment in the Long Run," NBER Working Papers 13924, National Bureau of Economic Research, Inc.
- Aleksander Berentsen & Guido Menzio & Randall Wright, 2009. "Inflation and unemployment in the long run," IEW - Working Papers 442, Institute for Empirical Research in Economics - University of Zurich.
- Brunner, Karl & Meltzer, Allan H, 1971. "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review, American Economic Association, vol. 61(5), pages 784-805, December.
- Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
- Williamson, Stephen D, 1987.
"Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,"
The Quarterly Journal of Economics,
MIT Press, vol. 102(1), pages 135-45, February.
- Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
- Lagos, Ricardo, 2010.
"Asset prices and liquidity in an exchange economy,"
Journal of Monetary Economics,
Elsevier, vol. 57(8), pages 913-930, November.
- Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007.
"Market Liquidity and Funding Liquidity,"
NBER Working Papers
12939, National Bureau of Economic Research, Inc.
- Ferraris, Leo & Watanabe, Makoto, 2008.
"Collateral secured loans in a monetary economy,"
Journal of Economic Theory,
Elsevier, vol. 143(1), pages 405-424, November.
- Nicolas Petrosky-Nadeau, .
"TFP during a Credit Crunch,"
GSIA Working Papers
2010-E70, Carnegie Mellon University, Tepper School of Business.
- Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
- Benjamin Lester & Andrew Postlewaite & Randall Wright, 2012. "Information, Liquidity, Asset Prices, and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1209-1238.
- Robin Boadway & Oana Secrieru & Marianne Vigneault, 2005. "A Search Model of Venture Capital, Entrepreneurship, and Unemployment," Working Papers 05-24, Bank of Canada.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jennifer dos Santos).
If references are entirely missing, you can add them using this form.