Safe Assets’ Scarcity, Liquidity and Spreads
This paper constructs a simple general equilibrium model to analyse the interactions between the financial and the real sector in an environment where liquidity holdings is an input of the credit/investment process. The supply of liquidity is constrained in that income pledgeability limits inside liquidity, and not all sovereign debt is safe/liquid. We pin down the determinants of liquidity/collateral premia and bond spreads, and with reference to the eurozone: (i) the implications of the ECB’s policies on liquidity provision and credit, and (ii) the debt management policy that would increase welfare with no need for transfer payments.
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- Holmstrom, B & Tirole, J, 1996.
"Private and Public Supply of Liquidity,"
96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
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17777, National Bureau of Economic Research, Inc.
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- Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
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