Liquidity frictions in macroeconomic models

In this dissertation, I extend the Neoclassical Growth model introducing a real and a financial friction. A real friction is present as some of the agents in the economy become entrepreneurs with the possibility of running investment projects. The financial friction prevent them to entirely borrow against the value of the investment or selling equity on existing capital to finance investment.;In Chapter 1 I investigate the effects of the frictions on the aggregate outcomes of the economy. I investigate in particular the optimality properties of the model and to what extent both types of frictions influence aggregate production and consumption and welfare. I focus also on the effects of these frictions on inequality and explore whether the interaction of both frictions can help to explain the U.S. wealth inequality. I find that the model predicts large welfare costs due to these frictions and that it is fairly successful in accounting for the inequality of wealth in the economy. Furthermore, I also show that a "liquidity crunch" can have sizeable negative welfare effects in the economy.;In Chapter 2 I introduce the assumption that the agent's utility function is linear. With the flexibility induced by this assumption, I incorporate money and monetary policy. I seek to characterize better the equilibrium and stochastic short run dynamics produced by liquidity fluctuations on the allocation of resources, and assess how these outcomes can be influenced through the injection of liquidity, either by means of lump sum transfers of cash or asset market trades by the central bank. I found that the economy displays a sub-optimal, monetary equilibrium only when liquidity frictions are substantially large. Money neutrality is found but not super-neutrality and the Friedman rule attains optimality irrespective of the instruments used to finance the deflation. As for dynamics, negative liquidity shocks can generate a contraction and a temporary drop in the asset prices. Moreover, the policy of direct asset trades by the central bank has differential effects in magnitude, persistence and even direction depending on how it is financed.