Liquidity policies and systemic risk
AbstractThe growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries’ leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies’ implications for household welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 661.
Length: 44 pages
Date of creation: 01 Dec 2014
Date of revision:
Find related papers by JEL classification:
- E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G00 - Financial Economics - - General - - - General
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-03-22 (All new papers)
- NEP-BAN-2014-03-22 (Banking)
- NEP-CFN-2014-03-22 (Corporate Finance)
- NEP-DGE-2014-03-22 (Dynamic General Equilibrium)
- NEP-FMK-2014-03-22 (Financial Markets)
- NEP-MAC-2014-03-22 (Macroeconomics)
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