corporate finance and monetary policy we develop a general equilibrium model where entrepreneurs finance random investment opportunities using trade credit bank issued assets or currency they search for bank funding in over the counter markets where loan sizes interest rates and down payments are negotiated bilaterally the theory generates pass through from nominal interest rates to real lending rates depending on market microstructure policy and firm characteristics higher banks bargaining power for example raises pass through but weakens transmission to investment interest rate spreads arise from liquidity regulatory and intermediation premia and depend on policy described as money growth or open market operations

a new monetarist model of fiat and e money we develop a dual payment new monetarist model where an electronic money e purse competes with fiat money cash the two payment instruments differ in terms of security cost and acceptability strategic complementarities lead to multiple monetary equilibria we establish the conditions under which e money can coexist with or replace fiat money and explain the reasons for the e purse failure success in a few countries we also compare welfare when one currency or both circulate when the risk of theft of cash is endogenous e money cannot replace cash entirely however low inflation can facilitate the adoption of e money in parallel with fiat money jel d83 e40 e50

firm size and executive compensation using several data sets the relationship between executive income and firm size is shown to be relatively stable over time and in different countries the elasticity of executive earnings to firm size is about the same today as it was in the 1930s with evidence of a decline in the earnings of top executives controlling for firm size in addition to the effects of size and other firm and industry characteristics there are returns to age and experience there is also substantial variability in the level of compensation among firms of comparable size indicating that there may be impediments to mobility

discrimination in an equilibrium search model i construct an equilibrium search model where some employers have a distaste for hiring minority workers and show that this bias results in economic discrimination against minority workers although only unprejudiced firms hire minority workers minority workers receive lower wages than workers not facing discrimination whenever any employers in the market have a distaste for minority workers one implication of the model is that gender or racial wage differentials understate the utility loss from discrimination in addition the wages of minority workers increase when their proportion increases in the labor market

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

the relative impact of inheritance and other factors on economic inequality an empirically grounded micro simulation of saving with bequests related negatively either in total to average children s income or separately to individual children s incomes is constructed for a single generation in a steady growth economy behavioral parameters are set so that predicted bequests to the next generation are consistent with both the scale and assignment of inheritances taken from a real world source for the simulation generation the relative impact of inheritance and other factors on different aspects of economic inequality is assessed while inheritance is a major cause of wealth inequality its influence on annual income and lifetime resources is small and in the latter case ambiguous inheritance perpetuates and may intensify inequalities arising originally from other causes in that sense it is a secondary cause of inequality but that is not of course to say that it is of secondary importance the extent of its influence on distribution remains an open question which cannot be decided merely by theoretical reasoning but requires in addition something in the nature of a quantitative analysis of the relevant facts wedgwood 1929 pp 60 61

the entrepreneur s reward for self policing the collaboration among people is often subject to shirking the net gain from the collaboration depends on the contract governing it i argue that the entrepreneur assumes the role of the residual claimant because his actions are more costly to monitor than those of the factors with which he collaborates by offering fixed pay contracts to others and himself becoming residual claimant the entrepreneur curtails his incentive to gain at the expense of his partners and the net gain from the collaboration is then maximized costly monitoring applies to both labor and capital and thus the entrepreneur may supply both labor services and capital the entrepreneur s capital serves to guarantee the pay of the other factors

dynamic asset allocation when bequests are luxury goods abstract luxury bequests impart systematic effects of age to an investor s optimal allocation the expected percentage allocation to equities rises throughout retirement when bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption this is essentially lower risk aversion as a retiree approaches death her expected remaining lifetime utility is increasingly composed of bequest utility and thus generates progressively lower risk aversion a retiree responds by increasingly favoring the higher return risky asset compared to standard preferences luxury bequests elevate a retiree s average exposure to the risky asset but the difference is small in early retirement

wage posting evidence from job ads recent studies of search theory examine how employers use a wage setting mechanism either by bargaining or through the posting of a non negotiable wage offer in a job ad to facilitate search we contribute to this literature by examining wage posting in job ads in the us the uk and slovenia despite considerable differences in the incidence of wage posting employers in all three markets are less likely to post a wage offer when searching for skilled workers the decision on whether or not to post a wage offer is only weakly related to the outcomes of employers search des etudes recentes de la theorie de la recherche d employes examinent comment les employeurs utilisent le mecanisme de determination des salaires soit par marchandage soit en mentionnant une offre de salaire non negociable dans l annonce de l offre d emploi pour faciliter le processus de recherche on examine les salaires mentionnes dans les annonces d offre d emplois aux etats unis au royaume uni et en slovenie malgre des differences considerables dans l incidence de l annonce du salaire les employeurs dans ces trois marches sont moins susceptibles d annoncer un salaire quand ils cherchent des travailleurs qualifies la decision d annoncer un salaire ou non est seulement faiblement reliee aux resultats de la recherche des employeurs

mission control the development of personnel systems in u s industry this paper examines historical differences in personnel practices among u s industries to explore the roots of modern bureaucratic work control we report multivariate analyses of data describing organizational personnel practices collected by the national industrial conference board between 1935 and 1946 we find evidence of three early strands of bureaucratic labor control in different industrial sectors worker allocation and job evaluation techniques which evolved from scientific management in modern assembly line industries internal labor market mechanisms in white collar nonmanufacturing practices related to seniority and the formalization of rules in unionized and skilled industries our analyses suggest that the institutional environment and the historical period of an industry s founding were among the central contingencies shaping labor control in a particular sector as were several factors that past research has emphasized more such as technology and skills labor market conditions and unionization our analyses thus corroborate some previous accounts of industrial differences in bureaucratic control while also suggesting some revisions concerning where when and why employment relations first became bureaucratized

entrepreneurial strategy and the presence of small firms a model is presented hypothesizing that the level of small firm presence in any given industry emanates from the exogenous stock of entrepreneurial talent a stochastic element of managerial and entrepreneurial talent entry deterrence and the entrepreneurial strategy deployed by small firms using data newly released by the u s small business administration the hypothesis is tested for a sample of 247 four digit standard industrial classification industries spanning the entire spectrum of firm sizes we find that consistently for all the measures of small firm size and for all of the time periods used the existence of entry deterrence and reliance upon innovative strategy explains a significant proportion of the variation in the presence of small firms

stochastic lifestyling optimal dynamic asset allocation for defined contribution pension plans this paper considers the asset allocation strategies open to members of deflnedcontribution pension plans we investigate a model that incorporates three sources of risk asset risk and salary or labour income risk in the accumulation phase and interest rate risk at the point of retirement we propose a new form of terminal utility function incorporating habit formation that uses the plan member s flnal salary as a numeraire the paper discusses various properties and characteristics of the optimal stochastic asset allocation strategy which we call stochastic lifestyling both with and without the presence of non hedgeable salary risk we compare the performance of stochastic lifestlying with some popular strategies used by pension providers including deterministic lifestyling which involves a gradual switch from equities to bonds according to preset rules and static strategies that invest in benchmark mixed funds we flnd that the use of stochastic lifestyling signiflcantly enhances the welfare of a wide range of potential plan members relative to these other strategies jel classiflcation e21 g11 g23

explicit solution of a general consumption portfolio problem with subsistence consumption and bankruptcy this paper solves a general continuous time single agent consumption and portfolio decision problem with subsistence consumption in closed form the analysis allows for general continuously differentiable concave utility functions the model takes into consideration that consumption must be no smaller than a given subsistence rate and that bankruptcy can occur thus the paper generalizes the results of karatzas lehoczky sethi and shreve 1986

efficient labor contracts with employment risk this article analyzes efficient employment agreements where the demand for consumption insurance can be satisfied by noncontractual means we assume that workers can save and that consumption is determined by a strong form of the permanent income hypothesis under conditions of asymmetric information about exogenous shocks to labor demand we derive a unique compensation schedule that efficiently guides decisions by both workers and employers efficient employment outcomes are generated without a need for third party enforcement or monitoring and workers choose a consumption policy that leaves them indifferent among realizations of labor demand within this solution it is both costless and efficient for workers to delegate employment decisions to the firm within the context of the model we analyze implications for the equilibrium distribution of wages and for empirical studies of labor supply

money and capital as competing media of exchange we construct a model where capital competes with fiat money as a medium of exchange and we establish conditions on fundamentals under which fiat money can be both valued and socially beneficial when the socially efficient stock of capital is too low to provide the liquidity agents need they overaccumulate productive assets to use as media of exchange when this is the case there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare under the friedman rule fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would

collateral secured loans in a monetary economy abstract this paper presents a microfounded model of money where durable assets serve as a guarantee to repay consumption loans we study a steady state equilibrium where money and credit coexist in such an equilibrium a larger investment in durable capital relaxes the borrowing constraint faced by consumers we show that the occurrence of over investment and the behavior of capital accumulation depend on the rate of inflation the relative risk aversion of agents and the marginal productivity of the capital goods

complex actions and simple outcomes how new entrepreneurs stay in business in this paper the entrepreneur within the new small firm is regarded as taking complex rather than simple actions which determine whether he or she will remain in business thus instead of simply choosing output as in the standard analysis of the competitive firm the entrepreneur may take actions which involve choices about markets finance organisation innovation and much else besides to explore this approach very detailed information on actions within small firms is required it is shown how this was obtained by a fieldwork study of new business starts using data from this fieldwork a rich statistical picture was created of actions within the new small firm in turn this permitted econometric analysis of actions that help a new small firm to stay in business over a three year period this indicates that the crucial actions which enable a small firm to stay in business are the rapid repayment of debt and the willingness to sacrifice short run profit for growth there is also evidence that staying in business is fostered by tight control of the wage bill especially by substituting other labour inputs for full time employees

wage determination of registered nurses in proprietary and nonprofit nursing homes this study explores why registered nurses employed in nonprofit nursing homes earn higher wages than those employed in proprietary facilities previous studies have explained this finding in a property rights context where higher wages were posited to result from the weaker incentives for cost minimization accompanying nonprofit status this paper tests an alternative explanation of sectoral wage differences which is predicated on the reason for the coexistence offor profit and nonprofit firms in a given industry informational constraints concerning the quality of care are posited to cause the long term health care market to fail to provide care at the upper levels of a quality of care continuum nonprofits are viewed as a response to this form of market failure acting to fulfill customers demand for higher quality and higher cost long term care with attendant demand for higher quality nurses than in for profit homes both the observed sectoral pattern in selectivity and wage decompositions based on selectivity corrected wage regressions call into question the property right explanation yet are consistent with an asymmetric information explanation

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

heterogeneous firms a consumer s report the august title the theory of the firm is well known to every student of economics less well known is what a firm is exactly what it may do or of what use this theory may be in understanding the world w y oi adds substance to our vague outline of a theory in his analysis of heterogeneous firms while posing a definite challenge of explanation for it if the result falls short of the mark it is an interesting attempt nevertheless

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

liquidity monetary policy and the financial crisis a new monetarist approach a model of public and private liquidity integrates financial intermediation theory with a new monetarist monetary framework nonpassive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the friedman rule a liquidity trap can exist in equilibrium away from the friedman rule and there exists a permanent nonneutrality of money driven by an illiquidity effect financial frictions can produce a financial crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income jel e13 e44 e52 e62 g01 liquidity is a class of assets that is useful in exchange some of these liquid assets are government liabilities federal reserve notes treasury bills and treasury notes some are private liabilities the deposit liabilities of banks and some asset backed securities for example conventional wisdom holds that the main role of a central bank is to manage public liquidity in a manner that controls inflation and enhances the provision of private liquidity and credit however the mechanism by which central bank actions work to perform this role still appears to be poorly understood as has been highlighted by the financial crisis and the ensuing policy responses the purpose of this paper is to build a model of public and private liquidity that captures the features of modern economies essential to the analysis of monetary policy and that can be used to shed light on some current monetary policy problems and questions what is a liquid asset and what roles do privately provided and publicly provided liquid assets play in exchange in a model where we capture these roles for liquid assets what are the implications for monetary policy under what circumstances can a liquidity trap occur how does monetary policy work when there is a positive quantity of excess reserves held by banks what does a financial crisis do to the supply of private liquidity and what should monetary policy do in response

the kinked demand curve a game theoretic approach in a simple model of duopoly firms price moves are modelled as an extensive form game where firms can respond to undercutting without delay when firms are not too dissimilar kinked demand strategies enforcing an arbitrary price may be nash equilibria however these strategies are dominated and perfect equilibrium is unique at the minimum optimal common price rather than implying price rigidity kinked demand strategies are a device for ensuring compliance with a collusive price leadership

pensions and wage premia i introduction despite the widespread acceptance of the theory of compensating differences empirical efforts to estimate the magnitude of these differences have met with only mixed success 1 with the exception of fatal risks economists have not been able to consistently find a significant relationship between wages and other job characteristics the failure to find consistent evidence on compensating differentials has been attributed to either poor measures of non wage characteristics or inadequate controls for worker productivity 2 studies by gunderson hyatt and pesando 1992 montgomery shaw and benedict 1992 and moore 1987 which have been able to explicitly address these issues have had greater success in finding significant compensating differentials in this paper we focus on an alternative explanation for the variation in estimated compensating differentials that the magnitude of the compensating differential varies systematically across different sectors in the labor market the theory of compensating differentials predicts that the implicit price or cost of providing a job attribute such as pensions will be a function of firm or industry technological differences and that the value attached to that attribute will also vary across workers depending on their tastes if workers and firms are not randomly assigned to sectors this will lead to systematic variations in the size of the estimated compensating differential across sectors or markets the result of this variation is that studies using different subsamples of the labor force will yield very different estimates of the size of the compensating differential the few studies that have addressed sources of heterogeneity in compensating differentials have concentrated on testing for individual differences in tastes for risk 3 in contrast our emphasis is on firm side differences in technologies or market power we estimate the compensating differential between annual pension accruals and wage rates and let this tradeoff vary by firm size and union status with corrections for selectivity bias the implicit cost of pensions and hence the size of the compensating differential may vary by finn size or union status for a number of reasons greater ability to spread fixed administrative costs across a large work force more difficulty monitoring worker effort or the presence of market power thus the cost of fringe benefits to the firm may be lower in large or unionized firms than in small nonunion firms we find empirical evidence supporting this view the estimated wage pension compensating differentials are smaller in unionized and large firms than in small nonunion firms the results from this paper are significant for several reasons 1 they provide evidence that compensating differentials vary across markets this evidence could account for some of the differences in estimates of tradeoffs across studies that have used different nonrandom samples 4 more importantly these sectoral differences serve as a reminder that the labor market is in fact a multitude of markets and that technological differences that vary across markets should be considered when addressing issues ranging from estimating the returns to human capital investment to the impact of the minimum wage 5 2 these results also deepen our knowledge of the relationship between pensions and wages a relationship that has important implications for the shape of workers wage earnings profiles or for the mechanisms for motivating workers and for the returns to human capital and for the distribution of income regarding the latter pensions are a large component of compensation and work by even and macpherson 1990 mccarthy and turner 1983 and moore 1987 suggests that coverage rates and returns are smaller for women and blacks our analysis suggests that an element of the differences could be sectoral choices

compensating differentials for shift work a model analyzing the choice of shift is developed and estimated using data from two supplements to the current population survey the findings show a positive wage premium for shift work that varies with personal characteristics and there is strong evidence showing the importance of self selection as workers with low potential daytime earnings are more likely to choose night work and supplement their earnings the findings demonstrate that cross section estimates of wage premiums for union membership and firm size are biased upward because they pick up some of the compensating differential for shift work

establishment size job satisfaction and the structure of work this paper empirically investigates a the relationship between establishment size and the degree of flexibility in the work environment and b the extent to which establishment size differences in workers satisfaction with their jobs can be accounted for by differences in their work environment the main findings are that large establishments do organize production in a less flexible fashion than do smaller establishments and that observed lower levels of job satisfaction in larger establishments net of wage and fringe benefit effects can largely be explained by the inflexibility in the work environment

interindustry wage differentials and the gender wage gap using data from the march 1988 current population survey the authors find that the wages of female workers differ significantly by industry even when the analysis controls for workers productivity related characteristics although these interindustry wage differentials are at least as large as men s and are highly correlated with them as well there are statistically significant differences between the two of the overall gender wage gap the average female worker earns about 65 as much as the average male worker 12 22 can be explained by differences between the patterns of interindustry wage differentials of men and women and 15 19 by differences in the distribution of male and female workers across industries thus the combined industry effects explain about one third of the overall gender wage gap

small businesses as a research subject some reflections on knowledge of small businesses and its effects on economic theory most economists agree in their view of small and medium sized enterprises or small businesses smes as a marginal scientific subject they may go so far as to ignore them either because they think these economic units do not lend themselves to conventional economic studies studies which for instance take into account the sacred cow theory of economies of scale or because they see them as being not really different from big businesses

theory of constant proportion portfolio insurance abstract we study constant proportion portfolio insurance cppi a dynamic strategy that maintains the portfolio s risk exposure a constant multiple of the excess of wealth over a floor up to a borrowing limit we use this simple rule to investigate how transaction costs and borrowing constraints affect portfolio insurance type strategies absent transaction costs cppi is equivalent to investing in perpetual american call options and is optimal for a piecewise hara utility function with a minimum consumption constraint as the multiple increases the payoffs under cppi approach those of a stop loss strategy the expected holding period return is not monotonic in the multiple and a higher expected return can be obtained under cppi than with a stop loss strategy

the importance of bequests and life cycle saving in capital accumulation a new answer as the workhorse of consumption and saving research for the past four decades the life cycle model has proved flexible and useful for examining a variety of questions in a classic paper albert ando and franco modigliani 1963 p 56 stated a key assumption of the basic model t he individual neither expects to receive nor desires to leave any inheritance although the authors contended that the absence of a bequest motive was not critical to the heart of their results the assumption set off a long standing battle over the relative importance of different motives for saving in an influential study laurence kotlikoff and laurence summers 1981 estimated that a large fraction of the u s capital stock was attributable to intergenerational transfers modigliani and his collaborators vigorously disagreed and based on their own empirical work claimed that life cycle saving was the primary source of capital accumulation modigliani 1988 subsequent work has failed to reach a consensus since this debate began an important advance in the consumption literature has been the incorporation of uncertainty in life cycle models see e g r glenn hubbard et al 1995 we argue that allowing for uncertainty resolves the controversy over the importance of life cycle and bequest saving by showing that these motives for saving are overlapping and cannot generally be distinguished a dollar saved today simultaneously serves both a precautionary life cycle function guarding against future contingencies such as health shocks or other emergencies and a bequest function because in the likely event that the dollar is not absorbed by these contingencies it will be available to bequeath to children or other worthy causes under this view households have a bequest motive but bequests are given i e the motive is operative in only some states of the world wealth is something like traveler s checks you take them along on vacation just in case but odds are they will remain uncashed and available for sundry goods after the journey is complete we first demonstrate the result using a simple model and then argue that this approach reconciles the apparent importance of bequests with households declared focus on life cycle saving finally we consider implications of our analysis

the cyclical behavior of the beveridge curve in the housing market abstract this paper develops a business cycle model of the housing market with search frictions and entry of both buyers and sellers the housing market exhibits a well established cyclical component which features three stylized facts prices move in the same direction as sales and the number of houses for sale but opposite to the time it takes to sell a house these stylized facts imply that in the data housing vacancies and the number of buyers are positively correlated i e that the beveridge curve is upward sloping a baseline search and matching model of the housing market is unable to match these stylized facts because it inherently generates a downward sloping beveridge curve with free entry of both buyers and sellers our model reproduces the positive correlation between prices sales and vacancies and matches the stylized facts qualitatively and quantitatively

the research agenda for small business economics books reviewed in this article acs z and audretsch d b eds 1990 the economics of small firms a european challenge

bargaining under liquidity constraints unified strategic foundations of the nash and kalai solutions abstract we provide unified strategic foundations for the nash 1950 and kalai 1977 solutions in the context of negotiations under liquidity constraints we propose an n round game where in each round a seller and a buyer with limited payment capacity negotiate a bundle of divisible goods where bundle sizes can vary across rounds according to rubinstein s 1982 alternating offer game the game implements the nash solution if n 1 and the kalai solution if n and bundle sizes are infinitesimal if n is set by one player ex ante the buyer chooses n 1 while the seller chooses n we endogenize liquidity constraints and show they bind for all n even when there is no cost in holding liquidity

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

pension portability and labor market efficiency a survey of the literature this paper reviews the theoretical and empirical literature evaluating the labor market effects of policies to enhance pension portability one perspective is that reducing the cost of job change w

employer size and labor turnover the role of pensions the well documented lower labor turnover in large firms than in smaller firms has been cited as evidence that large firms pay workers above their opportunity wage this study investigates whether t

turnover and promotion of lawyers an inquiry into gender differences this paper analyzes the turnover and promotion of male and female lawyers using data on two cohorts of lawyers one which entered law firms between 1969 and 1973 and the other entering between 1980 and 1983 this study considers whether law firm promotion decisions have differed for women and if so whether these differences have declined over time a competing risks duration model is employed to capture the link between the lawyer s decision to stay or leave and the firm s decision to grant or deny promotion we find that over the entire sample period women are considerably less likely to be promoted and slightly more likely to leave the firm without being promoted however we also find that the parametric differential between men and women in partnership hazards has been reduced substantially and in the most general of our specifications eliminated across the two cohorts in contrast the gap between male and female job turnover rates does not appear to change over time we find that the gap between males and females in the cumulative partnership rate at seven years of experience falls from 32 to 14 percent the turnover gap increases about 0 2 percent with females slightly more likely to exit from the firm in the later period

heterogeneous firms and the organization of production firms in the same industry exhibit systematic differences in the organization of production and the structure of employment entrepreneurial ability is the specific scarce input that limits the size of a firm this input must be allocated to two activities coordinating production and monitoring workers able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms greater ability implies a higher shadow price of time which increases the implicit costs of monitoring a dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms differences in monitoring costs affect the choice of worker productivities the design of products and the organization of production the monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment