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Liquidity and Financial Intermediation


  • DUTTA, Jayasri

    (Faculty of Economics and Politics, University of Cambridge)

  • KAPUR, Sandeep

    (Department of Economics, Birkbeck College)


This paper examines the errect of liquidity prden'nce on investment, output, and prices in competitive markets, with allernative struclures of financial intermediation. The need for liquidity is due to uncertainty in the preferences of individuals. Investment in physical capilal is unobservable, and so illiquid. Individuals are willing to carry liquid assets which are dominaled in lheir rate of return. We examine three types of economies: one with money, the second with bonds, and the third with investment banking. Monetary and interest rate policiles can have expansionary effects; the qualitative impact of policy interventions differ across asset structures. We also examine the aggregate provision for liquidity, as well as liquidity and term premia at equilibrium.

Suggested Citation

  • DUTTA, Jayasri & KAPUR, Sandeep, 1993. "Liquidity and Financial Intermediation," CORE Discussion Papers 1993030, Universit√© catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1993030

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    Cited by:

    1. Fulghieri, Paolo & Rovelli, Riccardo, 1998. "Capital markets, financial intermediaries, and liquidity supply," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1157-1180, September.

    More about this item


    Liquidity; liquidily premium; lerm pn:lTIium; rnoney; banking;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional


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