Citation

Discussion Paper Details

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Title: On the optimal supply of liquidity with borrowing constraints

Author(s): Francesco Lippi and Nicholas Trachter

Publication Date: March 2012

Keyword(s): Friedman rule, Heterogenous agents, Incomplete markets, Liquidity, Precautionary savings and State dependent policy.

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Lippi, F and Trachter, N. 2012. 'On the optimal supply of liquidity with borrowing constraints'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8890