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Collateral Restrictions and Liquidity Under-Supply: A Simple Model

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Author Info
Ana Fostel (Dept. of Economics, George Washington University)
John Geanakoplos () (Cowles Foundation, Yale University)

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Abstract

We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1468R.

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Length: 31 pages
Date of creation: Jun 2004
Date of revision: Aug 2006
Publication status: Published in Economic Theory (2008), 35: 441-467
Handle: RePEc:cwl:cwldpp:1468r

Note: CFP 1236.
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Related research
Keywords: Liquidity under-supply; Credit constraint; Non-monotonicity; Multiplier; Collateral equilibrium;

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Find related papers by JEL classification:
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F30 - International Economics - - International Finance - - - General
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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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.:
  1. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
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  2. Chang, R. & Velasco, A., 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Working Papers 99-14, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  3. Jones, Robert A & Ostroy, Joseph M, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 13-32, January. [Downloadable!] (restricted)
    Other versions:
  4. Nobuhiro Kiyotaki & John Moore, 2004. "Inside Money and Liquidity," ESE Discussion Papers 115, Edinburgh School of Economics, University of Edinburgh.
  5. Stephen Morris & Hyun Song Shin, 2003. "Liquidity Black Holes," Cowles Foundation Discussion Papers 1434, Cowles Foundation, Yale University. [Downloadable!]
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  6. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  7. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December. [Downloadable!] (restricted)
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  8. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. P. A. Diamond, 1982. "Money in Search Equilibrium," Working papers 297, Massachusetts Institute of Technology (MIT), Department of Economics.
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  10. Martin Shubik, 2000. "The Theory of Money," Cowles Foundation Discussion Papers 1253, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
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