Aggregate Liquidity and Banking: The Role of Loan Commitments and Liquidity Constraints
Access to short-term credit is an important source od liquidity for firms. This article shows that the usual asymmetric information problem in credit markets can result in an oversupply of trade credits, eventually leading to overproduction of liquidity and underinvestment in log-term projects. Banks help to solve this problem. They arrange a fixed credit line (or loan commitment) with a firm which constrains its borrowings even if it runs into difficulties. Hence, in the aggregate, banks reduce liquidity for the benefit of an increase in long-term investments. This model thus offers another view on the liquidity transformation function of banks.
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Volume (Year): 155 (1999)
Issue (Month): 3 (September)
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