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Money, Payments, and Liquidity$
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Ed Nosal and Guillaume Rocheteau

Print publication date: 2011

Print ISBN-13: 9780262016285

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262016285.001.0001

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PRINTED FROM MIT PRESS SCHOLARSHIP ONLINE (www.mitpress.universitypressscholarship.com). (c) Copyright The MIT Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in MITSO for personal use.date: 23 September 2021

Liquidity and Trading Frictions

Liquidity and Trading Frictions

Chapter:
(p.317) 12 Liquidity and Trading Frictions
Source:
Money, Payments, and Liquidity
Author(s):

Ed Nosal

Guillaume Rocheteau

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262016285.003.0012

This chapter expounds on the notion of the liquidity of an asset and its ability to function as a medium of exchange. Here, trading frictions are not associated with the purchase and consumption of goods. Instead, these are introduced into an asset market, or an over-the-counter market, with bilateral matches between investors and dealers. This model is further explored in an economy where investors accumulate capital goods to produce a general consumption good. Trading fictions are also endogenized by accepting free entry of dealers in the market-making sector. The chapter shows that multiple equilibria is reached due to the presence of complementarities between investors’ asset-holding decisions and dealers’ entry decisions, leading to the drying up of liquidity in the market because of self-fulfilling beliefs.

Keywords:   liquidity of an asset, medium of exchange, trading frictions, asset market, over-the-counter market, bilateral matches, multiple equilibria

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