Financial intermediation and the supply of liquidity

Jonathan Kreamer

Journal of Financial Stability, 2022, vol. 61, issue C

Abstract: I study the role of financial intermediaries in supplying liquidity to the real economy. Firms hold liquid assets to meet unanticipated expenses. Financial intermediaries supply liquidity by pooling partially liquid assets, but their ability to commit future funds depends on their capital. When liquidity is scarce, there is a positive liquidity premium and investment is inefficiently low. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity and find that when private liquidity is scarce the government should issue bonds for their liquidity properties, providing justification for countercyclical budget deficits.

Keywords: Liquidity; Financial intermediation; Financial crisis (search for similar items in EconPapers)
JEL-codes: E43 E44 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:61:y:2022:i:c:s157230892200047x

DOI: 10.1016/j.jfs.2022.101024

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