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A Tractable Model of Indirect Asset Liquidity

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

    (Department of Economics, University of California Davis)

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 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://wp.econ.ucdavis.edu/15-3.pdf
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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 153.

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Length: 12
Date of creation: 14 Oct 2015
Handle: RePEc:cda:wpaper:15-3
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