35 Pages Posted: 28 Feb 2011 Last revised: 14 Dec 2013
Date Written: October 14, 2013
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, G28
Suggested Citation: 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