Information and Liquidity: A Discussion

33 Pages Posted: 23 Apr 2010 Last revised: 28 Aug 2010

See all articles by Guillaume Rocheteau

Guillaume Rocheteau

Federal Reserve Bank of Cleveland; National University of Singapore (NUS)

Date Written: January 1, 2009

Abstract

I extend and discuss the model of asset liquidity by Lester, Postlewaite, and Wright (2007, 2008). I consider a model with decentralized trades in which claims on a real and divisible asset serve as means of payment. A recognizability problem is introduced by assuming that the claims on the asset can be counterfeited at a positive cost. This formalization nests the models by Lagos and Rocheteau (2008) and Geromichalos, Licari, and Suarez-Lledo (2007), in which there is no recognizability problem, and Lester, Postlewaite, and Wright (2007), in which counterfeits can be produced at no cost. Even though no counterfeiting occurs in equilibrium, the recognizability problem affects the composition of trades: Buyers consume less and spend a lower fraction of their asset holdings in matches where sellers are uninformed. Both the asset’s price and its liquidity (as measured by its transaction velocity) depend on the recognizability of the asset. The asset is more liquid and its return is lower if either the sellers’ ability to recognize counterfeits or the cost of producing counterfeits increases.

Keywords: Money, counterfeiting, search, bargaining

JEL Classification: D82, D83, E40

Suggested Citation

Rocheteau, Guillaume, Information and Liquidity: A Discussion (January 1, 2009). FRB of Cleveland Working Paper No. 09-02, Available at SSRN: https://ssrn.com/abstract=1594402

Guillaume Rocheteau (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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