This paper studies economies where firms acquire capital in primary markets and then, after idiosyncratic productivity shocks, retrade it in secondary markets that incorporate bilateral trade with search, bargaining, and liquidity frictions. We distinguish between full or partial sales (one firm gets all or some of the other’s capital) and document several long- and short-run empirical patterns between these variables and the cost of liquidity, as measured by inflation. Quantitatively, the model can match these patterns plus the standard business cycle facts. We also investigate the impact of search frictions, monetary and fiscal policy, persistence in shocks, and returns to scale.

This paper develops a micro-founded general equilibrium model of payments to study the impact of a central bank digital currency (CBDC) on intermediation of private banks. If banks have market power in the deposit market, a CBDC can enhance competition, raising the deposit rate, expanding intermediation, and increasing output. A calibration to the US economy suggests that a CBDC can raise bank lending by 1.57% and output by 0.19%. These crowding-in effects remain robust, albeit with smaller magnitudes, after taking into account endogenous bank entry. We also assess the role of a non-interest-bearing CBDC as the use of cash declines.