Outside Liquidity, Rollover Risk, and Government Bonds

Stephan Luck and Paul Schempp ()
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Paul Schempp: Max Planck Institute for Research on Collective Goods, Bonn

No 2014_14, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

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.

Keywords: liquidity provision; liquidity mismatch; bank run; roll-over freeze; outside liquidity; government bonds; liquidity regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 H63 H81 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ppm
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Citations: View citations in EconPapers (1)

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