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Information and Liquidity
Author(s) -
LESTER BENJAMIN,
POSTLEWAITE ANDREW,
WRIGHT RANDALL
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00440.x
Subject(s) - market liquidity , currency , private information retrieval , economics , monetary economics , value (mathematics) , bond , financial economics , stock (firearms) , construct (python library) , microeconomics , business , econometrics , finance , computer science , computer security , mechanical engineering , machine learning , programming language , engineering
We study how recognizability affects assets’ acceptability, or liquidity. Some assets, like U.S. currency, are readily accepted because sellers can easily recognize their value, unlike stock certificates, bonds or foreign currency, say. This idea is common in monetary economics, but previous models deliver equilibria where less recognizable assets are always accepted with positive probability, never probability 0. This is inconvenient when prices are determined through bargaining, which is difficult with private information. We construct models where agents reject outright assets that they cannot recognize, at least for some parameters. Thus, information frictions generate liquidity differences without overly complicating the analysis.