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Information and Liquidity

Author

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  • BENJAMIN LESTER
  • ANDREW POSTLEWAITE
  • RANDALL WRIGHT

Abstract

We study how recognizability affects assets’ acceptability, or liquidity. Some assets, like U.S. currency, are readily accepted because sellers can easily recognize their value, unlike stock certificates, bonds or foreign currency, say. This idea is common in monetary economics, but previous models deliver equilibria where less recognizable assets are always accepted with positive probability, never probability 0. This is inconvenient when prices are determined through bargaining, which is difficult with private information. We construct models where agents reject outright assets that they cannot recognize, at least for some parameters. Thus, information frictions generate liquidity differences without overly complicating the analysis.
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Suggested Citation

  • Benjamin Lester & Andrew Postlewaite & Randall Wright, 2011. "Information and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 355-377, October.
    • Handle: RePEc:mcb:jmoncb:v:43:y:2011:i::p:355-377
    DOI: j.1538-4616.2011.00440.x
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