Essays on liquidity and prices

This dissertation is composed of three essays. In the first essay, a framework is developed to assess alternative settlement system designs. I illustrate that more frequent settlement and more costly intra-day liquidity limit the risk of default should a bank be rendered insolvent. However, such policies impose greater costs on both the settlement system operator and its member banks. I parameterize the economy and characterize the optimal policy as a function of the economy\u27s fundamentals. The second essay explores the relationship between asset prices, liquidity, and monetary policy. In addition to the usual assumption that money and alternative assets promise different returns, I assume that they also differ with respect to their acceptability as a medium of exchange. I characterize an individual\u27s equilibrium portfolio and the resulting asset prices as a function of the inflation rate, and determine which agents and transactions are affected by monetary policy. I then endogenize liquidity by assuming that all claims are not immediately recognizable, but rather individuals must incur a cost in order to distinguish real from counterfeit assets. Given the distribution of these costs across agents, I determine the liquidity properties of each asset in equilibrium. In the final essay, I characterize the distribution of prices for a homogeneous good in a decentralized market economy with two frictions: some buyers are imperfectly informed ex-ante about sellers\u27 prices and sellers are capacity-constrained. I illustrate that a marginal increase in buyers\u27 information may lead to higher or lower prices, or have no effect at all. Moreover, the value of information is shown to be non-monotonic in the fraction of uninformed buyers. I then endogenize the information structure by allowing buyers to acquire information about prices at a cost. There exists a unique stable equilibrium in which some buyers purchase information and others do not, and potentially additional unstable equilibria. Given these results, I consider the plausibility of previous models of decentralized trade with exogenous assumptions on the information structure