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Collateral Restrictions and Liquidity Under-Supply: A Simple Model

Ana Fostel and John Geanakoplos ()
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John Geanakoplos: Cowles Foundation, Yale University, http://economics.yale.edu/people/john-geanakoplos

No 1468R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.

Keywords: Liquidity under-supply; Credit constraint; Non-monotonicity; Multiplier; Collateral equilibrium (search for similar items in EconPapers)
JEL-codes: D51 E44 F30 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin, nep-fmk, nep-mac, nep-mic and nep-mon
Date: 2004-06, Revised 2006-08
Note: CFP 1236.
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Published in Economic Theory (2008), 35: 441-467

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