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Liquidity And Inefficient Investment

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  • Oliver Hart
  • Luigi Zingales

Abstract

We study consumer liquidity in a general equilibrium model where the friction is the nonpledgeability of future income. Liquidity helps to overcome the absence of a double coincidence of wants. Consumers over-hoard liquidity and the resulting competitive equilibrium is constrained inefficient. Fiscal policy following a large negative shock can increase ex-ante welfare. If the government cannot commit, the ex-post optimal fiscal policy will be too small from an ex-ante perspective. The model throws light on the holding of foreign reserves in international markets.

Suggested Citation

  • Oliver Hart & Luigi Zingales, 2015. "Liquidity And Inefficient Investment," Journal of the European Economic Association, European Economic Association, vol. 13(5), pages 737-769, October.
  • Handle: RePEc:bla:jeurec:v:13:y:2015:i:5:p:737-769
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    File URL: http://hdl.handle.net/10.1111/jeea.12130
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    References listed on IDEAS

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    1. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 57-95.
    2. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536, January.
    3. Emmanuel Farhi & Mikhail Golosov & Aleh Tsyvinski, 2009. "A Theory of Liquidity and Regulation of Financial Intermediation," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 973-992.
    4. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 823-866.
    5. 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.
    6. Oliver D. Hart & Luigi Zingales, 2011. "Inefficient Provision of Liquidity," NBER Working Papers 17299, National Bureau of Economic Research, Inc.
    7. Olivier Jeanne & Anton Korinek, 2013. "Macroprudential Regulation Versus Mopping Up After the Crash," NBER Working Papers 18675, National Bureau of Economic Research, Inc.
    8. Ricardo J. Caballero & Arvind Krishnamurthy, 2009. "Global Imbalances and Financial Fragility," American Economic Review, American Economic Association, vol. 99(2), pages 584-588, May.
    9. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    10. Anton Korinek, 2011. "Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses," NFI Working Papers 2011-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
    11. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. repec:esx:essedp:755 is not listed on IDEAS
    2. Peter Haan & Martin Simmler, 2016. "Wind Electricity Subsidies = Windfall Gains for Land Owners? Evidence from Feed-In Tariff in Germany," Discussion Papers of DIW Berlin 1568, DIW Berlin, German Institute for Economic Research.
    3. Wang, T, 2014. "Lend out IOU: A Model of Money Creation by Banks and Central Banking," Economics Discussion Papers 12227, University of Essex, Department of Economics.
    4. repec:eee:pubeco:v:159:y:2018:i:c:p:16-32 is not listed on IDEAS
    5. Maya Eden & Benjamin Kay, 2015. "Safe Assets as Commodity Money," Working Papers 15-23, Office of Financial Research, US Department of the Treasury.

    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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