Sources of Liquidity and Liquidity Shortages

34 Pages Posted: 4 Jul 2017

See all articles by Charles Kahn

Charles Kahn

University of Illinois at Urbana-Champaign

Wolf Wagner

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

Date Written: June 2017

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 regulation, liquidity sources, public liquidity

JEL Classification: G21, G28

Suggested Citation

Kahn, Charles and Wagner, Wolf, Sources of Liquidity and Liquidity Shortages (June 2017). CEPR Discussion Paper No. DP12116. Available at SSRN: https://ssrn.com/abstract=2996661

Charles Kahn (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Wolf Wagner

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 )

London
United Kingdom

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