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The optimal quantity of money and partially-liquid assets

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  • Zannini, Ugo

Abstract

In a monetary economy à la Williamson (2012), in which a competitive financial sector insures agents facing idiosyncratic liquidity risk on interest-bearing assets, we introduce a competitive market for liquidity reallocation and study optimal policy. We show that, at any inflation rate above the Friedman rule, the market is a welfare-improving risk-sharing mechanism over Williamson's (2012) deposit contract. The optimal policy requires real asset scarcity, which increases the demand for money, and shrinks consumption inequality between asset and money users. Also, we demonstrate that the equilibrium deposit contract with re-trading opportunities in the asset market replicates the market allocations.

Suggested Citation

  • Zannini, Ugo, 2020. "The optimal quantity of money and partially-liquid assets," Journal of Economic Theory, Elsevier, vol. 188(C).
    • Handle: RePEc:eee:jetheo:v:188:y:2020:i:c:s0022053118304009
    DOI: 10.1016/j.jet.2020.105034
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    References listed on IDEAS

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    Cited by:

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    2. Hu, Tai-Wei, 2021. "Optimal monetary policy with interest on reserves and capital over-accumulation," Journal of Economic Theory, Elsevier, vol. 196(C).

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    More about this item

    Keywords

    Asset market; Financial intermediation; Liquidity effect; Monetary policy; Risk sharing;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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