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Liquidity and the International Allocation of Economic Activity

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  • Antonio Rodriguez‐Lopez

Abstract

I present a model to study the linkages between the market for liquidity and the international allocation of economic activity. Private assets' liquidity properties affect interest rates, with consequences on entry, production, and market capitalization. In a closed economy, the liquidity market increases the size and productivity of the sector that generates liquid assets. In an open economy, cross‐country differences in financial development generate an allocation of economic activity favoring the country supplying the most liquid assets. Supporting the theory, I show that asset acceptability as collateral is negatively correlated with yields, and positively correlated with measures of economic activity.

Suggested Citation

  • Antonio Rodriguez‐Lopez, 2021. "Liquidity and the International Allocation of Economic Activity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 789-830, May.
    • Handle: RePEc:wly:iecrev:v:62:y:2021:i:2:p:789-830
    DOI: 10.1111/iere.12496
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