Speculative and Precautionary Demand for Liquidity in Competitive Banking Markets

Diemo Dietrich and Thomas Gehrig

No 15827, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In standard models a preference for liquidity arises because investors want to take precautions against sudden expenditure needs. We propose that investors may also want to preserve flexibility in case better investment opportunities arrive later. The co-existence of both investor types is crucial for the scope and limits of bank liquidity creation. Co-existence can entail welfare gains in a friction-free world. However, when standard financial frictions apply, co-existence can result in welfare losses relative to a world with only a single investor type. In either case, policy recommendations based only on a single motive for liquidity demand may be seriously misguided.

Keywords: Expenditure needs; Investment opportunities; Liquidity insurance; Penalty rates; Competitive bank business models (search for similar items in EconPapers)
JEL-codes: D11 D86 E21 E22 G21 L22 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ias and nep-mac
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Related works:
Working Paper: Speculative and precautionary demand for liquidity in competitive banking markets (2021)
Working Paper: Speculative and Precautionary Demand for Liquidity in Competitive Banking Markets (2021)
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