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Dynamic Maturity Transforation

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Author Info

  • Anatoli Segura

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

  • Javier Suarez

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

Abstract

We develop an infinite horizon equilibrium model in which banks finance long term assets with non-tradable debt. Banks choose the amount of debt and its maturity taking into account investors’ preference for short maturities (which better accommodate their preference shocks) and the risk of systemic liquidity crises (during which refinancing is especially expensive). Unregulated debt maturities are inefficiently short due to pecuniary externalities in the market for funds during crises and their interaction with banks’ refinancing constraints. We show the possibility of improving welfare by means of limits to debt maturity, Pigovian taxes, and private and public liquidity insurance schemes.

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Bibliographic Info

Paper provided by CEMFI in its series Working Papers with number wp2011_1105.

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Date of creation: Nov 2011
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Handle: RePEc:cmf:wpaper:wp2011_1105

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Related research

Keywords: Liquidity premium; maturity transformation; systemic crises; liquidity regulation; pecuniary externalities; liquidity insurance.;

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  1. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2011. "Rollover Risk and Market Freezes," Journal of Finance, American Finance Association, vol. 66(4), pages 1177-1209, 08.
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Cited by:
  1. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," Tinbergen Institute Discussion Papers 11-040/2/DSF15, Tinbergen Institute.
  2. Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2013. "The fragility of short-term secured funding markets," Staff Reports 630, Federal Reserve Bank of New York.
  3. Konstantin Milbradt & Zhiguo He, 2012. "Endogenous liquidity and defaultable bonds," 2012 Meeting Papers 86, Society for Economic Dynamics.

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