Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity
Chapter in NBER book NBER Macroeconomics Annual 2013, Volume 28 (2014), Jonathan A. Parker and Michael Woodford, editors (p. 227 - 270)
When limited commitment hinders credit, assets help by serving as collateral. We study models where assets differ in pledgability, and hence liquidity. Previous analyses focus on producers; we emphasize consumers. Household debt limits are determined by of having assets seized after default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze monetary policy and financial innovation. Inflation can raise output, employment and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare.
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This paper was revised on October 15, 2013
Document Object Identifier (DOI): 10.1086/674600This chapter first appeared as NBER working paper w19009, Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity, Venky Venkateswaran, Randall Wright
Commentary on this chapter:
Comment, V. V. Chari
Comment, Jean Tirole
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