Macroprudential Policy with Liquidity Panics

Daniel Garcia-Macia and Alonso Villacorta

The Review of Financial Studies, 2023, vol. 36, issue 5, 2046-2090

Abstract: We study the optimality of macroprudential policies in an environment where banks provide liquidity to firms. Informational frictions between banks can cause interbank market freezes, prompting firms to accumulate their own liquid assets. Liquidity hoarding by firms in turn reduces the demand for bank loans and bank profitability, makes interbank market freezes even more likely, and may ultimately trigger a self-fulfilling bad equilibrium. Such “liquidity panics” provide an additional rationale for liquidity requirements on banks, which alleviate frictions in the banking sector and, paradoxically, can increase aggregate investment. Instead, policies encouraging bank lending can have the opposite effect.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Macroprudential policy with liquidity panics (2016)
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