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Liquidity and Financial Intermediation

Jayasri Dutta () and Sandeep Kapur

No 1993030, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper examines the errect of liquidity prden'nce on investment, output, and prices in competitive markets, with allernative struclures of financial intermediation. The need for liquidity is due to uncertainty in the preferences of individuals. Investment in physical capilal is unobservable, and so illiquid. Individuals are willing to carry liquid assets which are dominaled in lheir rate of return. We examine three types of economies: one with money, the second with bonds, and the third with investment banking. Monetary and interest rate policiles can have expansionary effects; the qualitative impact of policy interventions differ across asset structures. We also examine the aggregate provision for liquidity, as well as liquidity and term premia at equilibrium.

Keywords: Liquidity; liquidily premium; lerm pn:lTIium; rnoney; banking (search for similar items in EconPapers)
JEL-codes: E43 E14 (search for similar items in EconPapers)
Date: 1993-08-01
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