I construct a model of an asset market subject to search frictions, in an environment where both investment and asset liquidity (the speed of asset sales) are determined endogenously. The model provides a natural framework to analyze the interaction between capital reallocation and liquidity in response to aggregate shocks. The existing literature on capital reallocation has emphasized the role of asymmetric information or credit constraints as a source of liquidity frictions. I complement this work by considering search frictions. As in the unemployment literature, this leads me to jointly consider the determinants of capital reallocation and utilization as arising from a common source.
I define an asset as a business idea or production plan upon which physical capital can be invested in. Figure 1 summarizes the flow of assets through the economy. Assets are either owned by agents who use assets productively, i.e. "matched", or owned by agents who do not use the asset productively, i.e. "unmatched". Matched assets become unmatched at some exogenous "separation" rate. Search frictions imply it takes time to re-match assets, where the arrival rate of matches is determined by the endogenous ratio of potential asset buyers and sellers. Both matched and unmatched assets (and their capital stock) can become obsolescent and exit the economy, but are replaced by an exogenous measure of new assets, which are matched and invested in upon entry to the economy. The total population of assets is fixed.
During the 1990s, the concept of social capital took the centre stage in social scientific literature, and was received warmly by a diverse host of individuals and organizations such as academics, governments, non-governmental organizations (NGOs), as well as transnational entities like The World Bank and UNDP.
The concept was employed in many research areas in a wide range of disciplines, including sociology, political science, economics, public health, urban planning, criminology, architecture, and social psychology. One gross count by Putnam (2002) shows that the number of articles on social capital rose from about 20 in the years preceding 1980 to about 1003 in the latter half of the 1990s. Nothing illustrates the rising star of the concept better than the fact that the World Bank has now included social capital among its main criteria in assessing the feasibility of its projects (Edwards & Foley, 2001).
Recently, the popular international investment strategy is the “Carry trade”. It was build by borrowing the currency from the low interest rate country and investing in the high interest rate country. However, according to the international financial theory, i.e. the uncovered interest parity (UIP), the country with high interest rate their exchange rate would depreciation in the future. No matter how the investors earn from the differential interest rate between the two countries would offset by the exchange rate differential. Regarding the UIP, the earliest famous literature (Meese and Rogoff’s (1983) and Fama (1984)) used the exchange rate data to test it.
