Structural liquidity: The money-industry nexus

This paper addresses the relationship between liquidity and production activity. It argues that this rela-tionship becomes fully evident only if one considers intermediate levels of aggregation, and in particularstages of production within each industrial sector and their interdependence across sectors. To illus-trate this, the paper introduces the concept of structural liquidity, which denotes material funds that areendogenously formed within the productive system before one considers the provision of liquidity bymeans of money. Structural liquidity is analyzed by combining (i) the representation of the productivesystem as an arrangement of fabrication stages sequentially related in time; and (ii) the representation ofthe productive system as a set of interdependent industrial sectors. The analysis identifies the structuralliquidity problem as the need to satisfy both a viability condition (deriving from sectoral interdependen-cies) and a full employment condition (deriving from the sequencing of fabrication stages). The analysishighlights previously unexplored trade-offs, which have wide-ranging implications for monetary andliquidity policy.