The Welfare Effects of Liquidity Constraints
University of Salerno Working Paper No. 13
30 Pages Posted: 19 May 1999
There are 2 versions of this paper
The Welfare Effects of Liquidity Constraints
Date Written: December 1998
Abstract
We analyze the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the economy is dynamically inefficient. But if it is dynamically efficient, some degree of financial repression is required to maximize steady-state utility, even though some generations are hurt in the transition. With endogenous technical progress, financial repression may increase welfare even along the transition path, thus leading to a Pareto improvement. In this case the optimal degree of financial repression increases as the economy grows.
JEL Classification: E21, O16
Suggested Citation: Suggested Citation
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