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On the optimal supply of liquidity with borrowing constraints

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  • Lippi, Francesco
  • Trachter, Nicholas

Abstract

We characterize policies for the supply of liquidity in an economy where agents have a precautionary savings motive due to random production opportunities and the presence of borrowing constraints. We show that a socially efficient provision of liquidity involves a trade-off between insurance and production incentives. Two scenarios are studied: if no aggregate information is available to the policy maker, constant flat expansions are socially beneficial if unproductive spells are sufficiently long. If some aggregate information is available, a socially beneficial state-dependent policy prescribes expanding the supply of liquidity in recessions and contracting it in expansions.

Suggested Citation

  • Lippi, Francesco & Trachter, Nicholas, 2012. "On the optimal supply of liquidity with borrowing constraints," CEPR Discussion Papers 8890, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8890
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    References listed on IDEAS

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    6. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
    7. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152, Elsevier.
    8. Chiu, Jonathan & Molico, Miguel, 2010. "Liquidity, redistribution, and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 428-438, May.
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    Cited by:

    1. Yuliy Sannikov & Markus Brunnermeier, 2012. "The I Theory of Money," 2012 Meeting Papers 411, Society for Economic Dynamics.

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    More about this item

    Keywords

    Friedman rule; Heterogenous agents; Incomplete markets; Liquidity; Precautionary savings; State dependent policy.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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