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Sources of Liquidity and Liquidity Shortages

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  • Kahn, Charles M.
  • Wagner, Wolf

Abstract

We investigate a model of liquidity sources that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other sectors of the economy hold less of it and will consequently supply less in times of crisis. The private allocation of liquidity is inefficient and optimal liquidity regulation depends on the source of liquidity to which it is applied. Our model also identifies a limited role for public provision of liquidity, arising only when there is a general liquidity shortage in the economy but not if the shortage materializes solely in the banking system.

Suggested Citation

  • Kahn, Charles M. & Wagner, Wolf, 2017. "Sources of Liquidity and Liquidity Shortages," CEPR Discussion Papers 12116, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12116
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    References listed on IDEAS

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    17. repec:oup:rfinst:v:30:y:2017:i:10:p:3538-3580. is not listed on IDEAS
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    More about this item

    Keywords

    liquidity regulation; liquidity sources; public liquidity;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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