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Liquidity And Inefficient Investment

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  • Oliver Hart
  • Luigi Zingales

Abstract

We study consumer liquidity in a general equilibrium model where the friction is the nonpledgeability of future income. Liquidity helps to overcome the absence of a double coincidence of wants. Consumers over-hoard liquidity and the resulting competitive equilibrium is constrained inefficient. Fiscal policy following a large negative shock can increase ex-ante welfare. If the government cannot commit, the ex-post optimal fiscal policy will be too small from an ex-ante perspective. The model throws light on the holding of foreign reserves in international markets.

Suggested Citation

  • Oliver Hart & Luigi Zingales, 2015. "Liquidity And Inefficient Investment," Journal of the European Economic Association, European Economic Association, vol. 13(5), pages 737-769, October.
    • Handle: RePEc:bla:jeurec:v:13:y:2015:i:5:p:737-769
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    File URL: http://hdl.handle.net/10.1111/jeea.12130
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    3. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
    4. Dongfang Qiu & Huinan Wu, 2017. "Research on Inefficient Investment of Listed Companies in China," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(1), pages 238-238, December.
    5. Haan, Peter & Simmler, Martin, 2018. "Wind electricity subsidies — A windfall for landowners? Evidence from a feed-in tariff in Germany," Journal of Public Economics, Elsevier, vol. 159(C), pages 16-32.
    6. Maya Eden & Benjamin S. Kay, 2019. "Safe Assets as Commodity Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1651-1689, September.
    7. Moore, John, 2013. "Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty," SIRE Discussion Papers 2013-71, Scottish Institute for Research in Economics (SIRE).
    8. Ebrahimy, Ehsan, 2022. "Liquidity choice and misallocation of credit," European Economic Review, Elsevier, vol. 142(C).
    9. Wang, Tianxi, 2014. "Lend out IOU: A Model of Money Creation by Banks and Central Banking," Economics Discussion Papers 12227, University of Essex, Department of Economics.
    10. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.

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    More about this item

    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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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