Sources of Liquidity and Liquidity Shortages

Charles Kahn, Wolf Wagner

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Scopus)
62 Downloads (Pure)

Abstract

We develop a model of liquidity shortages that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other agents in the economy hold less of it and will supply less in times of crisis. We show that the private holdings of liquidity at banks are inefficient, with the direction of the bias being determined by the characteristics of the suppliers of liquidity to banks. Minimum liquidity requirements for banks may reduce welfare; in such cases interest rate policies that stimulate the ex-post supply of liquidity can restore efficiency. Overall, our results show that optimal liquidity policies critically depend on a financial institution's (marginal) source of liquidity and will hence differ across institutions of different types.

Original languageEnglish
Article number100869
JournalJournal of Financial Intermediation
Volume46
DOIs
Publication statusPublished - Apr 2021

Bibliographical note

Publisher Copyright:
© 2020 Elsevier Inc.

Research programs

  • RSM F&A

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