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Liquidity and asset prices: A new monetarist approach

  • Li, Ying-Syuan
  • Li, Yiting

When lenders cannot force borrowers to repay debts, assets are often pledged to secure loans. In this paper borrowers lose collateral once they renege on debts, and exclusion of defaulters occurs probabilistically, with a higher probability implying better enforcement. Increased efficiency in enforcement reduces asset prices, while raising loan-to-value ratios. If the rise in loan-to-value ratios is the dominant effect, aggregate liquidity and output increase with the advance in enforcement. Inflation raises the repayment cost by increasing the loan rate, while raising the default cost through exclusion. Consequently, inflation raises loan-to-value ratios and output only when enforcement is sufficiently efficient.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 4 ()
Pages: 426-438

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Handle: RePEc:eee:moneco:v:60:y:2013:i:4:p:426-438
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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