The Elastic Provision of Liquidity by Private Agents

Drew Saunders ()

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: I study a model of entrepreneurial investment in which investment projects are heterogeneous with respect to their exposure to an aggregate liquidity shock. A firm that is affected by the shock will mitigate its exposure by purchasing claims issued by a firm that is not. Liabilities of the unaffected firm may earn a liquidity premium due to their fungibility; and, because they are backed by productive investment, their supply is elastic to the demand. The segmentation implies that an aggregate liquidity shock has different consequences across sectors. The unaffected firm plays a role like that of a bank by supplying liquidity to other firms; this mechanism recalls the real bills doctrine of classical monetary theory.

Keywords: Liquidity; Money Supply Elasticity (search for similar items in EconPapers)
JEL-codes: E22 E44 E51 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2006-08
New Economics Papers: this item is included in nep-fmk and nep-mac
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Related works:
Journal Article: The Elastic Provision of Liquidity by Private Agents (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1195

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