Sources of Liquidity and Liquidity Shortages
Charles M. Kahn
University of Illinois, Urbana-Champaign
Tilburg University, Department of Economics and the European Banking Center
October 14, 2013
AFA 2012 Chicago Meetings Paper
We consider a model of liquidity sources that incorporates the general equilibrium nature of liquidity: when banks hold more liquidity, other sectors of the economy will hold less of it and supply lower amounts in times of crisis. The equilibrium allocation of liquidity across sectors is inefficient and optimal liquidity regulation depends on the source of liquidity to which it is applied. Our model of liquidity sources also identifies a limited role for public provision of liquidity, arising only when there is a general liquidity shortage in the economy but not if the shortage materializes solely in the banking system.
Keywords: liquidity sources, liquidity regulation, public liquidity
JEL Classification: G21, G28working papers series
Date posted: February 28, 2011 ; Last revised: October 27, 2013
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