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Liquidity and Financial Intermediation

Listed author(s):
  • Dutta, J.
  • Kapur, S.

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.

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Paper provided by Cambridge - Risk, Information & Quantity Signals in its series Papers with number 188.

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Length: 44 pages
Date of creation: 1993
Handle: RePEc:fth:cambri:188
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