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A Tractable Model of Indirect Asset Liquidity

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Abstract

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 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.

Suggested Citation

  • Lucas Herrenbrueck & Athanasios Geromichalos, 2015. "A Tractable Model of Indirect Asset Liquidity," Discussion Papers dp15-08, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp15-08
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    Cited by:

    1. Andolfatto, David & Martin, Fernando M. & Zhang, Shengxing, 2017. "Rehypothecation and liquidity," European Economic Review, Elsevier, pages 488-505.
    2. Herrenbrueck, Lucas, 2014. "Quantitative Easing and the Liquidity Channel of Monetary Policy," MPRA Paper 70686, University Library of Munich, Germany, revised 10 Apr 2016.
    3. repec:eee:dyncon:v:79:y:2017:i:c:p:184-200 is not listed on IDEAS
    4. Geromichalos, Athanasios & Herrenbrueck, Lucas, 2016. "The Strategic Determination of the Supply of Liquid Assets," MPRA Paper 71454, University Library of Munich, Germany.
    5. Crawford, Gregory S. & Pavanini, Nicola & Schivardi, Fabiano, 2015. "Asymmetric Information and Imperfect Competition in Lending Markets," CEPR Discussion Papers 10473, C.E.P.R. Discussion Papers.
    6. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.

    More about this item

    Keywords

    monetary-search models; asset liquidity; asset prices; monetary policy;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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