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Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity

  • Venky Venkateswaran
  • Randall Wright

When limited commitment hinders unsecured credit, assets help by serving as collateral. We study models where assets differ in pledgability - the extent to which they can be used to secure loans - and hence liquidity. Although many previous analyses of imperfect credit focus on producers, we emphasize consumers. Household debt limits are determined by the cost households incur when assets are seized in the event of default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation. We show that inflation can raise output, employment and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19009.

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Date of creation: May 2013
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Publication status: published as Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity , Venky Venkateswaran, Randall Wright. in NBER Macroeconomics Annual 2013, Volume 28 , Parker and Woodford. 2014
Handle: RePEc:nbr:nberwo:19009
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