Financial frictions and wealth distribution: a theoretic approach

Abstract

The purpose of the thesis is to show the implications of a specific financial friction, the lending-deposit spread rate, on the distribution of liquid wealth and on welfare. The lending-deposit spread rate is just the difference between the lending rate and the deposit rate. Liquid wealth is defined as the total set of tangible and intangible assets that are accepted as a mean of payment (e.g. cash, checks, credit cards, properties, reputation). The base model used to achieve that is a search-theoretic monetary one, in which individuals exchange money for consumption goods in a decentralized market structure. Bargaining takes place during bilateral meetings where agents sell or buy consumption goods between each other in return for a monetary transfer. The assumptions of the model allow to study lending-borrowing patterns over the quantity of money held by the individuals. A high lending rate forces agents to consume less while low level of the interest rate will generate more consumption. In this economy, there exist individuals that borrow or lend money. Borrowers are considered debtors only if their money holdings are below a certain monetary threshold. They will borrow from lenders paying the correspondent lending interest rate in order to acquire a unit of consumption.