dynamics of assets liquidity and inequality in economies with decentralized markets

Résumé 0

An algorithm for computing Dynamic Nash Equilibria (DNE) in an extended ver-sion of Kiyotaki and Wright (1989) (hereafter KW) is proposed. The algorithm com-putes the equilibrium pro.le of (pure) strategies and the evolution of the distributionof three types of assets across three types of individuals.It has two features that together make it applicable in a wide range of macroeco-nomic experiments: (i) it works for any feasible initial distribution of assets; (ii) itallows for multiple switches of trading strategies along the transitional dynamics.The algorithm is used to study the relationship between liquidity, production, andinequality in income and in welfare, in economies where assets fetch di¤erent returnsand agents have heterogeneous skills and preferences.One experiment shows a case of reversal of fortune. An economy endowed with alow-return asset takes over a similar economy endowed with a high-return asset because,in the former economy, a group of agents abandon a rent-seeking trading behavior andincrease their income by trading and producing more intensively. A second experimentshows that a reduction of market frictions leads both to higher income and lowerinequality. Other experiments evaluate the propagation mechanism of shocks that hitthe assets.returns.A key result is that trade and liquidity tend to squeeze income inequality.