Speculative and precautionary demand for liquidity in competitive banking markets

Diemo Dietrich and Thomas Gehrig

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We demonstrate that the co-existence of different motives for liquidity preferences profoundly affects the efficiency of financial intermediation. Liquidity preferences arise because consumers wish to take precautions against sudden and unforeseen expenditure needs, and because investors want to speculate on future investment opportunities. Without further frictions, the co-existence of these motives enables banks to gain efficiencies from combining liquidity insurance and credit intermediation. With standard financial frictions, banks cannot reap such economies of scope. Indeed, the co-existence of a precautionary and a speculative motive can cause efficiency losses which would not occur if there were only a single motive. Specifically, if the arrival of profitable future investment opportunities is sufficiently likely, such co-existence implies inefficient separation, pooling, or even non-existence of pure strategy equilibria. This suggests that policy implications derived solely from a single motive for liquidity demand can be futile.

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)
Pages: 52 pages
Date: 2021-06-16
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/118869/ Open access version. (application/pdf)

Related works:
Working Paper: Speculative and Precautionary Demand for Liquidity in Competitive Banking Markets (2022)
Working Paper: Speculative and Precautionary Demand for Liquidity in Competitive Banking Markets (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118869

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().