Abstract
In a monetary economy à la Williamson (2012), in which a competitive financial sector insures agents facing idiosyncratic liquidity risk on interest-bearing assets, we introduce a competitive market for liquidity reallocation and study optimal policy. We show that, at any inflation rate above the Friedman rule, the market is a welfare-improving risk-sharing mechanism over Williamson's (2012) deposit contract. The optimal policy requires real asset scarcity, which increases the demand for money, and shrinks consumption inequality between asset and money users. Also, we demonstrate that the equilibrium deposit contract with re-trading opportunities in the asset market replicates the market allocations.
Published Version
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