lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real … or spending. The price dynamics are driven solely by the liquidity premium on the debt …

We endogenize the liquidity and the quality of private assets in a tractable incomplete-market model with heterogeneous … agents. The model decomposes the convenience yield of government bond into a "liquidity premium" (flight to liquidity) and a … and bond premiums, the model reveals that a sharp reduction in the quality, instead of the liquidity, of private assets …