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The Elastic Provision of Liquidity by Private Agents

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  • Saunders, Drew

Abstract

I study a model of entrepreneurial investment in which investment projects are heterogeneous with respect to their exposure to an aggregate liquidity shock. A firm that is affected by the shock will mitigate its exposure by purchasing claims issued by a firm that is not. Liabilities of the unaffected firm may earn a liquidity premium due to their fungibility; and, because they are backed by productive investment, their supply is elastic to the demand. The segmentation implies that an aggregate liquidity shock has different consequences across sectors. The unaffected firm plays a role like that of a bank by supplying liquidity to other firms; this mechanism recalls the “real bills” doctrine of classical monetary theory.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1195.

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Length: 40 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:pur:prukra:1195

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Keywords: Liquidity ; Money Supply Elasticity;

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  1. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 663-91, August.
  2. Friedman, Benjamin M. & Kuttner, Kenneth N., 1993. "Another look at the evidence on money-income causality," Journal of Econometrics, Elsevier, Elsevier, vol. 57(1-3), pages 189-203.
  3. Anthony M. Santomero & John J. Seater, 1999. "Is There an Optimal Size for the Financial Sector," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 98-35, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers, Society for Economic Dynamics 512, Society for Economic Dynamics.
  6. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 415-436, October.
  7. Bengt Holmstrom & Jean Tirole, 1998. "LAPM: A Liquidity Based Asset Pricing Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 98-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  9. Bengt Holmström, 2001. "LAPM: A Liquidity-Based Asset Pricing Model," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1837-1867, October.
  10. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 49-71, March.
  11. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 292, University of Rochester - Center for Economic Research (RCER).
  12. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/9539, ULB -- Universite Libre de Bruxelles.
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