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Financial intermediation and the supply of liquidity

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  • Kreamer, Jonathan

Abstract

I study the role of financial intermediaries in supplying liquidity to the real economy. Firms hold liquid assets to meet unanticipated expenses. Financial intermediaries supply liquidity by pooling partially liquid assets, but their ability to commit future funds depends on their capital. When liquidity is scarce, there is a positive liquidity premium and investment is inefficiently low. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity and find that when private liquidity is scarce the government should issue bonds for their liquidity properties, providing justification for countercyclical budget deficits.

Suggested Citation

  • Kreamer, Jonathan, 2022. "Financial intermediation and the supply of liquidity," Journal of Financial Stability, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finsta:v:61:y:2022:i:c:s157230892200047x
    DOI: 10.1016/j.jfs.2022.101024
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    More about this item

    Keywords

    Liquidity; Financial intermediation; Financial crisis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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