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A tractable model of indirect asset liquidity

Listed author(s):
  • Herrenbrueck, Lucas
  • Geromichalos, Athanasios
Registered author(s):

    Assets have “indirect liquidity” if they cannot be used as media of exchange, but can be traded to obtain a medium of exchange (money) and thereby inherit monetary properties. This essay describes a simple dynamic model of indirect asset liquidity, provides closed form solutions for real and nominal assets, and discusses properties of the solutions. Some of these are standard: assets and money are imperfect substitutes, asset demand curves slope down, and money is not always neutral. Other properties are more surprising: prices are flexible but appear sticky, and an increase in the supply of indirectly liquid assets can decrease welfare. Because of its simplicity, the model can be useful as a building block inside a larger model, and for teaching concepts from monetary theory.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053116301259
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    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 168 (2017)
    Issue (Month): C ()
    Pages: 252-260

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    Handle: RePEc:eee:jetheo:v:168:y:2017:i:c:p:252-260
    DOI: 10.1016/j.jet.2016.12.009
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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    2. Athanasios Geromichalos & Lucas Herrenbrueck, 2016. "The Strategic Determination of the Supply of Liquid Assets," Working Papers 161, University of California, Davis, Department of Economics.
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    7. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
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