The Elastic Provision of Liquidity by Private Agents

Drew Saunders

Journal of Money, Credit and Banking, 2009, vol. 41, issue 7, pages 1423-1451

Abstract: I study a model of investment by financially constrained firms that are heterogeneous with respect to their exposure to an aggregate liquidity shock. A firm that is susceptible to the shock will mitigate its exposure by purchasing claims issued by a firm that is not. Liabilities of an unaffected firm may earn a liquidity premium due to their fungibility, and because they are backed by productive investment, their supply is elastic to the demand. This segmentation implies that an aggregate liquidity shock has different consequences across sectors of the economy. Copyright (c) 2009 The Ohio State University.

Date: 2009

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