Liquidity Policies and Systemic Risk

44 Pages Posted: 12 Jan 2014

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Nina Boyarchenko

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2013


The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries’ leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies’ implications for household welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.

Keywords: liquidity regulation, systemic risk, DSGE, financial intermediation

JEL Classification: E02, E32, G00, G28

Suggested Citation

Adrian, Tobias and Boyarchenko, Nina, Liquidity Policies and Systemic Risk (December 1, 2013). FRB of New York Staff Report No. 661. Available at SSRN: or

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


Nina Boyarchenko

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

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