A Tractable Model of Indirect Asset Liquidity

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Geromichalos, A., and Herrenbrueck, L. "A Tractable Model of Indirect Asset Liquidity." Journal of Economic Theory 168 (2017): 252-260. DOI 10.1016/j.jet.2016.12.009

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Monetary-search models
Asset liquidity
Asset prices
Monetary policy
Monetary aggregates

Assets have “indirect liquidity” if they cannot be used as media of exchange, but can be traded to obtain a medium of exchange (money) and thereby inherit monetary properties. This essay describes a simple dynamic model of indirect asset liquidity, provides closed form solutions for real and nominal assets, and discusses properties of the solutions. Some of these are standard: assets and money are imperfect substitutes, asset demand curves slope down, and money is not always neutral. Other properties are more surprising: prices are flexible but appear sticky, and an increase in the supply of indirectly liquid assets can decrease welfare. Because of its simplicity, the model can be useful as a building block inside a larger model, and for teaching concepts from monetary theory.

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