Information and Liquidity |
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| Authors: | BENJAMIN LESTER ANDREW POSTLEWAITE RANDALL WRIGHT |
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| Affiliation: | 1. Benjamin Lester is the Bank of Montreal Associate Professor of Economics at University of Western Ontario and a Senior Economist at the Federal Reserve Bank of Philadelphia. (E‐mail: blester@uwo.ca).;2. Andrew Postlewaite is the Henry P. Kamen Professor of Economics and Professor of Finance, University of Pennsylvania (E‐mail: apostlew@econ.upenn.edu).;3. Randall Wright is the James Joo‐Jin Kim Professor of Economics, University of Pennsylvania;4. Ray Zemon Professor of Liquid Assets in Finance and Economics, University of Wisconsin at Madison;5. Consultant, Federal Reserve Bank of Minneapolis (E‐mail: rwright@bus.wisc.edu). |
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| Abstract: | We study how recognizability affects assets’ acceptability, or liquidity. Some assets, like U.S. currency, are readily accepted because sellers can easily recognize their value, unlike stock certificates, bonds or foreign currency, say. This idea is common in monetary economics, but previous models deliver equilibria where less recognizable assets are always accepted with positive probability, never probability 0. This is inconvenient when prices are determined through bargaining, which is difficult with private information. We construct models where agents reject outright assets that they cannot recognize, at least for some parameters. Thus, information frictions generate liquidity differences without overly complicating the analysis. |
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| Keywords: | D82 D83 E4 asymmetric information liquidity money |
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