With unlimited access to market instruments, consumption variability, if any, can be driven by aggregate income shocks, but temporary idiosyncratic income variability would be smoothed out. Liquidity is useless in such circumstances, since all personal wealth is already fully liquid. Real-world consumption smoothing appears to be less than perfect. In addition, both companies and households routinely hold liquid instruments with little or no fundamental value. In this chapter, we examine a departure from the standard model in which heterogeneous traders cannot borrow without limit against their future income. The profile of personal consumption fluctuates over time independently of the variability of aggregate income and consumption. Liquid instruments help improve resource allocation. The price of such liquid instruments diverges from the fundamental value, including a liquidity premium. The creation of liquidity by monetary authorities can be socially beneficial by helping people relax their liquidity restriction when it is needed most, at the cost of creating inflation that erodes the value of currency.