 Real liquidity and bankingZehao Liu and Ping He Journal of Financial Intermediation, 2022, vol. 49, issue C Abstract: In an economy where banks take numeraire goods, so called money, as deposits, money allows depositors suffering preference shocks to withdraw from banks prematurely without liquidation of real investment. If real liquidity, defined as the real value of the monetary base, is low, the amount of payment liquidity, constrained by the velocity of money, limits the short-term price level of investment goods before banks can settle their long-term loan contracts. This leads to an attractive nominal long-term investment return and over-investment. Allowing for inside money, that is, bank deposits, to be used for payment can improve social welfare but cannot fully resolve the liquidity shortage problem as the short-term interest rate offered by banks is constrained by the threat of bank runs. In the presence of systemic liquidity shocks, the price-adjustment mechanism cannot take full effects with insufficient payment liquidity, which can lead to non-zero profits for banks. Exchanging investment goods for numeraire goods through international trade can improve social welfare. Keywords: Real liquidity; Medium of payment; Velocity of money; Liquidity shortage; Bank efficiency (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:49:y:2022:i:c:s1042957320300498 DOI: 10.1016/j.jfi.2020.100895 Access Statistics for this article Journal of Financial Intermediation is currently edited by Elu von Thadden More articles in Journal of Financial Intermediation from Elsevier |
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