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Liquidity, Efficiency, and Bank Bailouts

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Author Info
Gary Gorton
Lixin Huang

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Abstract

Governments can efficiently provide liquidity, as when the banking system is bailed out. We study a model in which not all assets can be used to purchase all other assets at every date. Agents sometimes want to sell projects. The market price of the projects sold depends on the supply of liquidity, which is determined in general equilibrium. While private liquidity provision is socially beneficial since it allows valuable reallocations, it is also socially costly since liquidity suppliers could have made more efficient investments ex ante. There is a role for the government to supply liquidity by issuing government securities.

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File URL: http://hdl.handle.net/10.1257/0002828041464650
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 3 (June)
Pages: 455-483
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Handle: RePEc:aea:aecrev:v:94:y:2004:i:3:p:455-483

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  3. Claudia Helene Dziobek & Ceyla Pazarbasioglu, 1997. "Lessons from Systemic Bank Restructuring: A Survey of 24 Countries," IMF Working Papers 97/161, International Monetary Fund.
  4. James Daniel, 1997. "Fiscal Aspects of Bank Restructuring," IMF Working Papers 97/52, International Monetary Fund.
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  10. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-56, October.
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  11. Gary Gorton & Lixin Huang, 2002. "Bank Panics and the Endogeneity of Central Banking," Center for Financial Institutions Working Papers 02-29, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  12. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Schanz, Jochen, 2009. "How do different models of foreign exchange settlement influence the risks and benefits of global liquidity management?," Bank of England working papers 374, Bank of England. [Downloadable!]
  2. Wagner, Wolf, 2006. "Diversification at financial institutions and systemic crises," Discussion Paper 71, Tilburg University, Center for Economic Research. [Downloadable!]
  3. Filippo Taddei, 2007. "Liquidity and the Allocation of Credit: Business Cycle, Government Debt and Financial Arrangements," Carlo Alberto Notebooks 65, Collegio Carlo Alberto. [Downloadable!]
  4. Brutti, Filippo, 2008. "Legal enforcement, public supply of liquidity and sovereign risk," MPRA Paper 13949, University Library of Munich, Germany. [Downloadable!]
  5. Kleopatra Nikolaou, 2009. "Liquidity (risk) concepts - definitions and interactions," Working Paper Series 1008, European Central Bank. [Downloadable!]
  6. Acharya, Viral V & Shin, Hyun Song & Yorulmazer, Tanju, 2007. "Fire Sales, Foreign Entry and Bank Liquidity," CEPR Discussion Papers 6309, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2009. "Outside and Inside Liquidity," NBER Working Papers 14867, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Franklin Allen & Elena Carletti & Douglas Gale, 2009. "Interbank Market Liquidity and Central Bank Intervention," Economics Working Papers ECO2009/09, European University Institute. [Downloadable!]
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