IDEAS home Printed from https://ideas.repec.org/p/mpg/wpaper/2014_14.html
   My bibliography  Save this paper

Outside Liquidity, Rollover Risk, and Government Bonds

Author

Listed:
  • Stephan Luck

    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Paul Schempp

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

This paper discusses whether financial intermediaries can optimally provide liquidity, or whether the government has a role in creating liquidity by supplying government securities. We discuss a model in which intermediaries optimally manage liquidity with outside rather than inside liquidity: instead of holding liquid real assets that can be used at will, banks sell claims on long-term projects to investors. While increasing efficiency, liquidity management with private outside liquidity is associated with a rollover risk. This rollover risk either keeps intermediaries from providing liquidity optimally, or it makes the economy inherently fragile. In contrast to privately produced claims, government bonds are not associated with coordination problems unless there is the prospect that the government may default. Therefore, efficiency and stability can be enhanced if liquidity management relies on public outside liquidity.

Suggested Citation

  • Stephan Luck & Paul Schempp, 2014. "Outside Liquidity, Rollover Risk, and Government Bonds," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_14, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2014_14
    as

    Download full text from publisher

    File URL: http://www.coll.mpg.de/pdf_dat/2014_14online.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    2. Òscar Jordá & Moritz Schularick & Alan M. Taylor, 2016. "Sovereigns Versus Banks: Credit, Crises, and Consequences," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 45-79.
    3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    4. Vratislav Izák, 2014. "Private and Public Debt," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2014(1), pages 4-21.
    5. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-491, June.
    6. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    7. Falko Fecht, 2004. "On the Stability of Different Financial Systems," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 969-1014, December.
    8. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    9. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
    10. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    11. Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1049-1084, December.
    12. Ricardo Lagos, 2006. "Inside and outside money," Staff Report 374, Federal Reserve Bank of Minneapolis.
    13. Gilles Saint‐Paul, 2005. "Fiscal Policy and Economic Growth: the Role of Financial Intermediation," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 612-629, August.
    14. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephan Luck & Paul Schempp, 2014. "Sovereign Defaults, Bank Runs, and Contagion," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_15, Max Planck Institute for Research on Collective Goods.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dunhong Jin & Marcin Kacperczyk & Bige Kahraman & Felix Suntheim, 2022. "Swing Pricing and Fragility in Open-End Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 35(1), pages 1-50.
    2. Xavier Vives, 2014. "Strategic Complementarity, Fragility, and Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3547-3592.
    3. Rajkamal Iyer & Manju Puri, 2012. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," American Economic Review, American Economic Association, vol. 102(4), pages 1414-1445, June.
    4. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    5. Xuewen Liu, 2023. "A Model of Systemic Bank Runs," Journal of Finance, American Finance Association, vol. 78(2), pages 731-793, April.
    6. Franklin Allen & Elena Carletti, 2013. "Financial Markets, Institutions and Liquidity," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    7. Dietrich, Diemo & Gehrig, Thomas, 2021. "Speculative and precautionary demand for liquidity in competitive banking markets," LSE Research Online Documents on Economics 118869, London School of Economics and Political Science, LSE Library.
    8. Donaldson, Jason Roderick & Piacentino, Giorgia & Thakor, Anjan, 2018. "Warehouse banking," Journal of Financial Economics, Elsevier, vol. 129(2), pages 250-267.
    9. Assaf Razin & Itay Goldstein, 2012. "Review Of Theories of Financial Crises," 2012 Meeting Papers 214, Society for Economic Dynamics.
    10. Anatoli Segura & Javier Suarez, 2017. "How Excessive Is Banks’ Maturity Transformation?," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3538-3580.
    11. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    12. Martin Brown & Stefan T. Trautmann & Razvan Vlahu, 2017. "Understanding Bank-Run Contagion," Management Science, INFORMS, vol. 63(7), pages 2272-2282, July.
    13. Michael Junho Lee, 2018. "Uncertain booms and fragility," Staff Reports 861, Federal Reserve Bank of New York.
    14. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    15. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    16. Schilling, Linda, 2017. "Optimal Forbearance of Bank Resolution," MPRA Paper 112409, University Library of Munich, Germany.
    17. Anil K. Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2014. "How does macroprudential regulation change bank credit supply?," NBER Working Papers 20165, National Bureau of Economic Research, Inc.
    18. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    19. Xavier Vives, 2006. "Banking and Regulation in Emerging Markets: The Role of External Discipline," The World Bank Research Observer, World Bank, vol. 21(2), pages 179-206.
    20. Molyneux, Philip & Upreti, Vineet & Zhou, Tim, 2023. "Depositor market discipline: New evidence from selling failed banks," International Review of Financial Analysis, Elsevier, vol. 89(C).

    More about this item

    Keywords

    liquidity provision; liquidity mismatch; bank run; roll-over freeze; outside liquidity; government bonds; liquidity regulation;
    All these keywords.

    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
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mpg:wpaper:2014_14. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marc Martin (email available below). General contact details of provider: https://edirc.repec.org/data/mppggde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.