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Private money creation, liquidity crises, and government interventions

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  • Benigno, Pierpaolo
  • Robatto, Roberto

Abstract

The joint supply of public and private liquidity is examined when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to investing in low-risk projects always eliminates liquidity crises but reduces welfare. Under some conditions, deposit insurance gives rise to an equilibrium in which intermediaries that issue insured debt (i.e., traditional banks) coexist with others that issue uninsured debt (i.e., shadow banks), despite the two being ex ante identical.

Suggested Citation

  • Benigno, Pierpaolo & Robatto, Roberto, 2019. "Private money creation, liquidity crises, and government interventions," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 42-58.
  • Handle: RePEc:eee:moneco:v:106:y:2019:i:c:p:42-58
    DOI: 10.1016/j.jmoneco.2019.07.005
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    Cited by:

    1. Benigno, Pierpaolo, 2019. "Monetary Policy in a World of Cryptocurrencies," CEPR Discussion Papers 13517, C.E.P.R. Discussion Papers.
    2. Benigno, Pierpaolo & Robatto, Roberto, 2019. "Inefficiency and Regulation of Private Liquidity," CEPR Discussion Papers 13631, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Public and private liquidity; Financial crises; Deposit insurance; Asset purchases; Financial regulation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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