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Liquidity And Inefficient Investment

Author

Listed:
  • 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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    Cited by:

    1. repec:esx:essedp:755 is not listed on IDEAS
    2. Maya Eden & Benjamin S. Kay, 2019. "Safe Assets as Commodity Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1651-1689, September.
    3. 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.
    4. Dongfang Qiu & Huinan Wu, 2017. "Research on Inefficient Investment of Listed Companies in China," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(1), pages 238-238, December.
    5. Ebrahimy, Ehsan, 2022. "Liquidity choice and misallocation of credit," European Economic Review, Elsevier, vol. 142(C).
    6. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
    7. Wang, Tianxi, 2014. "Lend out IOU: A Model of Money Creation by Banks and Central Banking," Economics Discussion Papers 12227, University of Essex, Department of Economics.
    8. Haan, Peter & Simmler, Martin, 2018. "Wind electricity subsidies — A windfall for landowners? Evidence from a feed-in tariff in Germany," Journal of Public Economics, Elsevier, vol. 159(C), pages 16-32.
    9. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.
    10. John Moore, 2013. "Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty," Edinburgh School of Economics Discussion Paper Series 233, Edinburgh School of Economics, University of Edinburgh.

    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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