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Liquidity and Financial Intermediation


Author Info

  • DUTTA, Jayasri

    (Faculty of Economics and Politics, University of Cambridge)

  • KAPUR, Sandeep

    (Department of Economics, Birkbeck College)


This paper examines the errect of liquidity prden'nce on investment, output, and prices in competitive markets, with allernative struclures of financial intermediation. The need for liquidity is due to uncertainty in the preferences of individuals. Investment in physical capilal is unobservable, and so illiquid. Individuals are willing to carry liquid assets which are dominaled in lheir rate of return. We examine three types of economies: one with money, the second with bonds, and the third with investment banking. Monetary and interest rate policiles can have expansionary effects; the qualitative impact of policy interventions differ across asset structures. We also examine the aggregate provision for liquidity, as well as liquidity and term premia at equilibrium.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1993030.

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Date of creation: 01 Aug 1993
Date of revision:
Handle: RePEc:cor:louvco:1993030

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Keywords: Liquidity; liquidily premium; lerm pn:lTIium; rnoney; banking;

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Cited by:
  1. Fulghieri, Paolo & Rovelli, Riccardo, 1998. "Capital markets, financial intermediaries, and liquidity supply," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1157-1180, September.


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