Liquidity hoarding

Douglas Gale and Tanju Yorulmazer

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

Abstract: Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planner's problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash.

Keywords: interbank market; fire sale (search for similar items in EconPapers)
JEL-codes: D80 G12 G21 G24 G32 G33 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2011-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119067

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