Private money creation, liquidity crises, and government interventions

Pierpaolo Benigno and Roberto Robatto

Journal of Monetary Economics, 2019, vol. 106, issue C, 42-58

Abstract: The joint supply of public and private liquidity is examined when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to investing in low-risk projects always eliminates liquidity crises but reduces welfare. Under some conditions, deposit insurance gives rise to an equilibrium in which intermediaries that issue insured debt (i.e., traditional banks) coexist with others that issue uninsured debt (i.e., shadow banks), despite the two being ex ante identical.

Keywords: Public and private liquidity; Financial crises; Deposit insurance; Asset purchases; Financial regulation (search for similar items in EconPapers)
JEL-codes: E44 G01 G28 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Private Money Creation, Liquidity Crises, and Government Intervention (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:106:y:2019:i:c:p:42-58

DOI: 10.1016/j.jmoneco.2019.07.005

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