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Liquidity and the International Allocation of Economic Activity

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  • Antonio Rodriguez-Lopez

Abstract

This paper introduces a framework to study the linkages between the financial market for liquid assets and the international allocation of economic activity. Private assets’ liquidity properties -their usefulness as collateral or media of exchange in financial transactions – affect assets’ values and interest rates, with consequences on firm entry, production, aggregate productivity, and total market capitalization. In a closed economy, the liquidity market increases the size and productivity of the sector of the economy that generates liquid assets. In an open economy, however, cross-country differences in financial development - as measured by the degree of liquidity of a country’s assets - generate an allocation of real economic activity that favors the country that supplies the most liquid assets. In such a setting, trade liberalization magnifies the gap in economic activity between the countries.

Suggested Citation

  • Antonio Rodriguez-Lopez, 2016. "Liquidity and the International Allocation of Economic Activity," CESifo Working Paper Series 6286, CESifo.
  • Handle: RePEc:ces:ceswps:_6286
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    More about this item

    Keywords

    liquidity; trade; financial development; interest rates;
    All these keywords.

    JEL classification:

    • 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
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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