Illiquidity and All Its Friends

Jean Tirole

Journal of Economic Literature, 2011, vol. 49, issue 2, 287-325

Abstract: The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistic, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity, and analyzes how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyzes optimal combinations thereof; it stresses the need for macro-prudential policies. ( JEL E44, G01, G21, G28, G32, L51)

JEL-codes: E44 G01 G21 G28 G32 L51 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/jel.49.2.287
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (116)

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Related works:
Working Paper: Illiquidity and all its Friends (2010)
Working Paper: Illiquidity and all its friends (2010)
Working Paper: Illiquidity and all its Friends (2010)
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