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Economics of Regulation: Credit Rationing and Excess Liquidity

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  • cho, hyejin

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

  • cho, hyejin, 2016. "Economics of Regulation: Credit Rationing and Excess Liquidity," MPRA Paper 75775, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75775
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    References listed on IDEAS

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    More about this item

    Keywords

    credit rationing; excess liquidity; inside liquidity; risk preference; machina triangle;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • 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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