Liquidity Policies and Systemic Risk

Nina Boyarchenko and Tobias Adrian

No 720, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time varying tightness of liquidity and capital constraints generates intermediaries' leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies' implications for households' welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.

Date: 2014
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Related works:
Journal Article: Liquidity policies and systemic risk (2018)
Working Paper: Liquidity Policies and Systemic Risk (2017)
Working Paper: Liquidity Policies and Systemic Risk (2014)
Working Paper: Liquidity policies and systemic risk (2014)
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