Sources of Liquidity and Liquidity Shortages

31 Pages Posted: 28 Feb 2011 Last revised: 22 Jun 2017

See all articles by Charles M. Kahn

Charles M. Kahn

University of Illinois, Urbana-Champaign; Bank of Canada; Federal Reserve Bank of Saint Louis

Wolf Wagner

Erasmus University Rotterdam (EUR)

Date Written: October 14, 2013

Abstract

We investigate a model of liquidity sources that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other sectors of the economy hold less of it and will consequently supply less in times of crisis. The private allocation of liquidity is inefficient and optimal liquidity regulation depends on the source of liquidity to which it is applied. Our model also identifies a limited role for public provision of liquidity, arising only when there is a general liquidity shortage in the economy but not if the shortage materializes solely in the banking system.

Keywords: liquidity sources, liquidity regulation, public liquidity

JEL Classification: G21, G28

Suggested Citation

Kahn, Charles M. and Wagner, Wolf, Sources of Liquidity and Liquidity Shortages (October 14, 2013). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1570504 or http://dx.doi.org/10.2139/ssrn.1570504

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Federal Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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