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Asset Liquidity in Monetary Theory and Finance: A Unified Approach

Author

Listed:
  • Athanasios Geromichalos

    () (Department of Economics, University of California, Davis)

  • Kuk Mo Jung

    () (Department of Economics, Sogang University, Seoul)

  • Seungduck Lee

    () (Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea)

  • Dillon Carlos

    () (Department of Economics, University of California, Davis)

Abstract

Economists often say that certain types of assets, e.g., Treasury bonds, are very ‘liquid’. Do they mean that these assets are likely to serve as media of exchange or collateral (a definition ofliquidityoftenemployedinmonetarytheory), orthattheycanbeeasilysoldinasecondary market, if needed (a definition of liquidity closer to the one adopted in finance)? We develop a model where these two notions of asset liquidity coexist, and their relative importance is determined endogenously in general equilibrium: how likely agents are to visit a secondary market in order to sell assets for money depends on whether sellers of goods/services accept these assets as means of payment. But, also, the incentive of sellers to invest in a technology that allows them to recognize and accept assets as means of payment depends on the exis- tence (and efficiency) of a secondary market where buyers could liquidate assets for cash. The interaction between these two channels offers new insights regarding the determination of asset prices and the ability of assets to facilitate transactions and improve welfare.

Suggested Citation

  • Athanasios Geromichalos & Kuk Mo Jung & Seungduck Lee & Dillon Carlos, 2019. "Asset Liquidity in Monetary Theory and Finance: A Unified Approach," Working Papers 1905, Research Institute for Market Economy, Sogang University.
  • Handle: RePEc:sgo:wpaper:1905
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    More about this item

    Keywords

    Information; Over-the-Counter ; Searchnd Matxhg; Liquidity; Asset prices; Monary policy;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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