The welfare effects of liquidity constraints

We analyze the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the e conomy is dynamically inefficient. But if ii is dynamically efficient, some degree of financial repression is required to maximize steady-state utilit y, even though some generations are hurt in the transition. With endogenous technical progress, financial repression may increase welfare even along t he transition path, thus leading to a Pareto improvement. In this case the optimal degree of financial repression increases as the economy grows.