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LIQUIDITY CONSTRAINTS IN A MONETARY ECONOMY *
Author(s) -
Ferraris Leo,
Watanabe Makoto
Publication year - 2012
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2011.00679.x
Subject(s) - market liquidity , liquidity constraint , constraint (computer aided design) , economics , monetary economics , investment (military) , cash , liquidity crisis , inflation (cosmology) , liquidity trap , consumption (sociology) , macroeconomics , mechanical engineering , physics , politics , theoretical physics , law , political science , engineering , social science , sociology
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.