This paper presents a microfounded model of money with a consumption and an investment
market. We consider an economy in which only part of the investment returns
can be pledged. A liquidity constraint arises when the pledgeable part of the returns are
not enough to pay for investment costs. We show that when the liquidity constraint is
binding, agents may make a cash downpayment and money can perform two roles – as a
provider of liquidity services and exchange services. The liquidity constraint constitutes a
channel though which under-investment occurs even at low inflation rates.
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 pdf (it, 407 KB, 01/04/10)
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