Inside Liquidity in Competitive Markets

Inside Liquidity

We study a model in which a special role for safe, short-term assets in facilitating financial intermediation encourages the private sector to issue these assets to supplement the public supply of safe, short-term assets, even though their role in providing liquidity can be put in jeopardy during financial panics that lead agents to question the low-risk nature of these assets. During “normal” ...

Outside and Inside Liquidity∗

We consider a model of liquidity demand arising from a possible maturity mismatch between asset revenues and consumption. This liquidity demand can be met with either cash reserves (inside liquidity) or via asset sales for cash (outside liquidity). The question we address is, what determines the mix of inside and outside liquidity in equilibrium? An important source of inefficiency in our model...

Inside and Outside Liquidity∗

We consider a model of liquidity demand arising from a possible maturity mismatch between asset revenues and consumption. This liquidity demand can be met with either cash reserves (inside liquidity) or via asset sales for cash (outside liquidity). The questions we address are: (a) what determines the mix of inside and outside liquidity in equilibrium? (b) does the market provide an efficient m...

Liquidity in Frictional Asset Markets

Banks, Markets and Liquidity

The banking sector is one of the most highly regulated sectors in the economy. However, in contrast to other regulated sectors there is no wide agreement on the market failures that justify regulation. We suggest that there are two important failures. The fi rst is a coordination problem that arises because of multiple equilibria. If people believe there is going to be a panic then that can be ...