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Liquidity Hoarding

Douglas M. Gale

New York University (NYU) - Department of Economics

Tanju Yorulmazer

Federal Reserve Bank of New York

March 1, 2011

FRB of New York Staff Report No. 488

Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planner’s problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash.

Number of Pages in PDF File: 66

Keywords: interbank market, fire sale

JEL Classification: G12, G21, G24, G32, G33, D8

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Date posted: March 26, 2011  

Suggested Citation

Gale, Douglas M. and Yorulmazer, Tanju, Liquidity Hoarding (March 1, 2011). FRB of New York Staff Report No. 488. Available at SSRN: http://ssrn.com/abstract=1794062 or http://dx.doi.org/10.2139/ssrn.1794062

Contact Information

Douglas M. Gale
New York University (NYU) - Department of Economics ( email )
269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)
Tanju Yorulmazer (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://www.ny.frb.org/research/economists/yorulmazer/index.html
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