We are grateful to Nobu Kiyotaki and Randy Wright for their insightful comments and suggestions. Thanks are also due to participants at the 2008 Money, Banking, and Payments Conference held at the Federal Reserve Bank of Chicago, three anonymous referees, and the editor of the journal for helpful advice and feedback. Financial support from the Spanish government in the form of research grant ECO2009-10531 and research fellowship, Ramon y Cajal, is gratefully acknowledged. Please address correspondence to: Leo Ferraris, Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Madrid, Spain. Phone: +34 91 624 9619. Fax: +34 91 624 9329. E-mail: email@example.com.
LIQUIDITY CONSTRAINTS IN A MONETARY ECONOMY*
Article first published online: 22 FEB 2012
© (2012) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
International Economic Review
Volume 53, Issue 1, pages 255–277, February 2012
How to Cite
Ferraris, L. and Watanabe, M. (2012), LIQUIDITY CONSTRAINTS IN A MONETARY ECONOMY. International Economic Review, 53: 255–277. doi: 10.1111/j.1468-2354.2011.00679.x
Manuscript received February 2010; revised September 2010.
- Issue published online: 22 FEB 2012
- Article first published online: 22 FEB 2012
This article presents a microfounded model of money with a consumption and an investment market. We consider an economy in which only part of the investment returns can be pledged. A liquidity constraint arises when the pledgeable part of the returns are not enough to pay for investment costs. We show that when the liquidity constraint is binding, agents may make a cash downpayment and money can perform two roles—as a provider of liquidity services and exchange services. The liquidity constraint constitutes a channel though which underinvestment occurs even at low inflation rates.