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Private Money Creation and Equilibrium Liquidity

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  • Benigno, Pierpaolo
  • Robatto, Roberto

Abstract

Can a perfectly competitive issuance of private money fulfill the liquidity needs of the economy? The answer is no. Multiple equilibria are possible: there exist good equilibria with complete satiation of liquidity and absence of default on private money, and bad equilibria characterized by a shortage of liquidity and default. Capital requirements improve welfare provided that leverage is neither too high nor too low. Liquidity regulation can be counterproductive. Government intervention during liquidity crises is beneficial unless fiscal capacity is limited.

Suggested Citation

  • Benigno, Pierpaolo & Robatto, Roberto, 2016. "Private Money Creation and Equilibrium Liquidity," CEPR Discussion Papers 11242, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11242
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    References listed on IDEAS

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