Liquidity Provision, Interest Rates, and Unemployment
نویسندگان
چکیده
This paper develops a continuous-time model of the public and private provision of liquidity and its relation to unemployment. We extend the Mortensen-Pissarides model of the labor market by adding an over-the-counter (OTC) market where trades are collateralized with claims on rmspro ts and public liabilities backed by taxes. As a result, the real interest rate is endogenous and depends on the nancing needs of rms, the liquidity needs of OTC-traders, and the public supply of liquidity. When the unemployment is ine¢ ciently high, it is optimal to keep liquidity scarce thereby reducing the total surplus of OTC-traders to lower interest rates and promote job creation. In a version of the model with at money and nominal bonds, we show that an increase in ination reduces the real interest rate and the unemployment rate. We study the dynamics of the labor market under a liquidity shortage and we introduce heterogeneity across private claims in order to illustrate how a shock to liquidity demand can generate collateral expansion and increase job creation. JEL Classi cation: D82, D83, E40, E50
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