Modeling Aggregate Liquidity

Because net worth influences the scope of investment and because investment has a positive social return, there is a demand for entrepreneurs (or firms) to insure themselves against exogenous shocks to net worth. Ideally, firms would like to prevent external shocks from influencing their future inve...

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Bibliographic Details
Published in:The American economic review 1996-05, Vol.86 (2), p.187-191
Main Authors: Holmstrom, Bengt, Tirole, Jean
Format: Article
Language:English
Subjects:
Assets
Capital investments
Credit insurance
Economic models
Economic theory
Entrepreneurs
Financial investments
Investors
Liquidity
Liquidity model
Liquidity premiums
Macroeconomics
Monetary policy
Net investment
Studies
Supply
Transactional Microstructure and Macroeconomic Performance
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Summary:Because net worth influences the scope of investment and because investment has a positive social return, there is a demand for entrepreneurs (or firms) to insure themselves against exogenous shocks to net worth. Ideally, firms would like to prevent external shocks from influencing their future investment levels. The question then arises: does the market offer sufficient insurance opportunities, or will the government have a role to play? Rephrased in terms of liquidity, the question reads: do private claims on real investments supply enough liquidity, or can the government enhance liquidity by issuing its own securities? If the government has a role to play, how should it manage aggregate liquidity? The fact that, given incomplete insurance, assets will command liquidity premia, is highlighted.
ISSN:0002-8282
1944-7981