Asriyan, Vladimir2021-03-232021-03-232020Asriyan V. Balance sheet channel with information-trading frictions in secondary markets. Rev Econ Stud. 2020 Oct 29;88(1):44-90. DOI: 10.1093/restud/rdaa0690034-6527http://hdl.handle.net/10230/46898This article develops a theory of the balance sheet channel that places a central emphasis on the liquidity of secondary markets for macro-contingent claims. We show that the presence of dispersed information and imperfect competition in secondary markets, interacted with financial constraints, results in mispricing and misallocation of aggregate risk, distorts aggregate investment, and exacerbates asset price and output volatility. The magnitude of balance sheet amplification effects becomes endogenously tied to the severity of market frictions, which likely vary over time and across economies. The laissez-faire equilibrium is constrained inefficient due to a novel externality originating from rent-extracting behaviour of agents in secondary markets. Optimal corrective policy boosts secondary market liquidity through subsidies to trade in macro-contingent claims, which enhances aggregate risk-sharing and stabilizes the business cycle.application/pdfengThis is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited.info:eu-repo/semantics/articlehttp://dx.doi.org/10.1093/restud/rdaa069Balance sheet channelSecondary marketsRisk-sharingLiquidityInformation dispersionTrading frictionsMechanism designFinancial regulationinfo:eu-repo/semantics/openAccess