Economics of Regulation: Credit Rationing and Excess Liquidity

Hyejin Cho

MPRA Paper from University Library of Munich, Germany

Abstract: : In examining the global imbalance by the excess liquidity level, the argument is whether commercial banks want to hold excess reserves for the precautionary aim or expect to get better return through risky decision. By pictorial representations, risk preference in the Machina’s triangle (1982, 1987) encapsulates motivation to hold excess liquidity. This paper introduces an endogenous liquidity model for the financial sector where the imbalance argument comes from credit rationing extended from outside liquidity (Holmstrom and Tirole, 2011). We also conduct a stylistic analysis of excess liquidity in Jordan and Lebanon from 1993 to 2015. As such, the proposed model exemplifies the combination of credit, liquidity and regulation.

Keywords: credit rationing; excess liquidity; inside liquidity; risk preference; machina triangle (search for similar items in EconPapers)
JEL-codes: D51 E58 L51 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ban and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:75775

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