Collateral Restrictions and Liquidity Under-Supply: A Simple Model
We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.
|Date of creation:||Jun 2004|
|Date of revision:||Aug 2006|
|Publication status:||Published in Economic Theory (2008), 35: 441-467|
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