The remarkable increase in the real rate of interest all over the world and the appreciation of the dollar real exchange rate, toghether with the large fiscal stimulus from President Reagan's program has brought government deficits and their effects on the economy back to the foreground of the...

This paper constructs a simple general equilibrium model to analyse the interactions between the financial and the real sector in an environment where liquidity holdings is an input of the credit/investment process. The supply of liquidity is constrained in that income pledgeability limits...