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Sources of Liquidity and Liquidity Shortages


Charles M. Kahn


University of Illinois, Urbana-Champaign

Wolf Wagner


Tilburg University, Department of Economics and the European Banking Center

October 14, 2013

AFA 2012 Chicago Meetings Paper

Abstract:     
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.

Number of Pages in PDF File: 35

Keywords: liquidity sources, liquidity regulation, public liquidity

JEL Classification: G21, G28

working papers series


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Date posted: February 28, 2011 ; Last revised: December 14, 2013

Suggested Citation

Kahn, Charles M. and Wagner, Wolf, Sources of Liquidity and Liquidity Shortages (October 14, 2013). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1570504 or http://dx.doi.org/10.2139/ssrn.1570504

Contact Information

Charles M. Kahn
University of Illinois, Urbana-Champaign ( email )
Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States
217-333-2813 (Phone)
HOME PAGE: http://kahnfrance.com/cmk/
Wolf Wagner (Contact Author)
Tilburg University, Department of Economics and the European Banking Center ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
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