Abstract:

We study consumer liquidity in a general equilibrium model where the friction is the non-pledgeability of future income. Liquidity helps to overcome the absence of a double coincidence of wants. Consumers over-hoard liquidity and the resulting competitive equilibrium is constrained inefficient. Fiscal policy following a large negative shock can increase ex ante welfare. If the government cannot commit, the ex post optimal fiscal policy will be too small from an ex ante perspective.