Asset Dynamics, Liquidity, and Inequality in Decentralized Markets

The Kiyotaki and Wright model has exerted a considerable influence on the monetary search literature. We argue that the model also delivers important insights into a broader range of macroeconomic and development issues. The analysis studies how market frictions and the liquidity of assets affect the distribution of income. Experiments illustrate how the economy adjusts to shocks to asset returns and to the matching technology. They also deal with long-run transition. An experiment interprets the reversal of fortune hypothesis as a situation in which an economy with a low-return asset takes over a similar economy with a high-return asset.