Sources of Liquidity and Liquidity Shortages
31 Pages Posted: 28 Feb 2011 Last revised: 22 Jun 2017
Date Written: October 14, 2013
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: Suggested Citation