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Money and Asset Liquidity in Frictional Capital Markets

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  • Wei Cui
  • Sören Radde

Abstract

We endogenize asset liquidity and financing constraints in a dynamic general equilibrium model with search frictions on capital markets. Assets traded on frictional capital markets are only partially saleable. Liquid assets, such as fiat money, instead, are not subject to search frictions and can be used to insure idiosyncratic investment risks. Partially saleable assets thus carry a liquidity premium over fully liquid assets. We show that, in equilibrium, low asset saleability is typically associated with lower asset prices, tighter financing constraints, thus stronger demand for public liquidity. Lower asset liquidity feeds into real allocations, constraining real investment, consumption, and production.

Suggested Citation

  • Wei Cui & Sören Radde, 2016. "Money and Asset Liquidity in Frictional Capital Markets," American Economic Review, American Economic Association, vol. 106(5), pages 496-502, May.
    • Handle: RePEc:aea:aecrev:v:106:y:2016:i:5:p:496-502
    Note: DOI: 10.1257/aer.p20161078
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    References listed on IDEAS

    as
    1. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    2. Wei Cui & Sören Radde, 2020. "Search-based Endogenous Asset Liquidity and the Macroeconomy [Why Don’t US Issuers Demand European Fees for IPOs?]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2221-2269.
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    Citations

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    Cited by:

    1. Marco Bassetto & Wei Cui, 2024. "A Ramsey Theory of Financial Distortions," Journal of Political Economy, University of Chicago Press, vol. 132(8), pages 2612-2654.
    2. Blouri, Yashar & Ehrlich, Maximilian V., 2020. "On the optimal design of place-based policies: A structural evaluation of EU regional transfers," Journal of International Economics, Elsevier, vol. 125(C).
    3. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    4. Paweł Kopiec, 2018. "Interbank market turmoils and the macroeconomy," NBP Working Papers 280, Narodowy Bank Polski.
    5. Wei Cui, 2017. "When Ramsey Searches for Liquidity," 2017 Meeting Papers 1342, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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