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Economics Of Regulation: Credit Rationing And Excess Liquidity

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  • Hyejin Cho

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

In examining the global imbalance by the excess liquidity level, the argument is whether commercial banks want to hold excess reserves for the precautionary aim or expect to get better return through risky decision. By pictorial representations, risk preference in the Machina's triangle (1982, 1987) encapsulates motivation to hold excess liquidity. This paper introduces an endogenous liquidity model for the financial sector where the imbalance argument comes from credit rationing extended from outside liquidity (Holmstrom and Tirole, 2011). We also conduct a stylistic analysis of excess liquidity in Jordan and Lebanon from 1993 to 2015. As such, the proposed model exemplifies the combination of credit, liquidity and regulation.

Suggested Citation

  • Hyejin Cho, 2017. "Economics Of Regulation: Credit Rationing And Excess Liquidity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01375423, HAL.
  • Handle: RePEc:hal:cesptp:hal-01375423 Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01375423v2
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    References listed on IDEAS

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    1. William R. Allen, 1956. "Interbank Deposits And Excess Reserves," Journal of Finance, American Finance Association, vol. 11(1), pages 68-73, March.
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    3. John Moore & Nobuhiro Kiyotaki, 2008. "Liquidity, Business Cycles, and Monetary Policy," 2008 Meeting Papers 35, Society for Economic Dynamics.
    4. Simon T Gray & Philippe D Karam & Rima Turk-Ariss, 2014. "Are Banks Really Lazy? Evidence from Middle East and North Africa," IMF Working Papers 14/86, International Monetary Fund.
    5. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536.
    6. Magnus Saxegaard, 2006. "Excess Liquidity and Effectiveness of Monetary Policy; Evidence from Sub-Saharan Africa," IMF Working Papers 06/115, International Monetary Fund.
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    8. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    9. Simon T Gray, 2011. "Central Bank Balances and Reserve Requirements," IMF Working Papers 11/36, International Monetary Fund.
    10. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
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    13. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
    14. Gian M Milesi-Ferretti & Olivier J Blanchard, 2009. "Global Imbalances; In Midstream?," IMF Staff Position Notes 2009/29, International Monetary Fund.
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    17. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
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    More about this item

    Keywords

    credit rationing; excess liquidity; inside liquidity; risk preference; E58; L51;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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