Download this Paper Open PDF in Browser

Sources of Liquidity and Liquidity Shortages

31 Pages Posted: 28 Feb 2011 Last revised: 22 Jun 2017

Charles M. Kahn

University of Illinois, Urbana-Champaign; Feseral Reserve Bank of Saint Louis; Bank of Canada

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: October 14, 2013

Abstract

We investigate a model of liquidity sources that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other sectors of the economy hold less of it and will consequently supply less in times of crisis. The private allocation of liquidity is inefficient and optimal liquidity regulation depends on the source of liquidity to which it is applied. Our model 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, G28

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: https://ssrn.com/abstract=1570504 or http://dx.doi.org/10.2139/ssrn.1570504

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Feseral Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
460
Rank
51,023
Abstract Views
3,174