Liquidity hoarding

Douglas Gale, Tanju Yorulmazer

    Research output: Contribution to journalArticle

    Abstract

    Costly bankruptcy and incomplete markets cause inefficient liquidity hoarding. Banks are unable to trade contingent claims to liquidity, so they raise cash by selling illiquid assets on spot markets. Such trading increases asset-price volatility and creates the incentive to hoard liquidity. Hoarding creates a second inefficiency: the aggregate level of liquidity is inefficient too. A lender of last resort can implement the constrained-efficient allocation, but only if it intervenes so aggressively that it shuts down the private provision of liquidity altogether, becoming in effect the lender of first resort.

    Original languageEnglish (US)
    Pages (from-to)291-324
    Number of pages34
    JournalTheoretical Economics
    Volume8
    Issue number2
    DOIs
    StatePublished - May 2013

    Keywords

    • Cash-in-the-market pricing
    • Central bank
    • Fire sale
    • Interbank market
    • Market freeze

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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  • Cite this

    Gale, D., & Yorulmazer, T. (2013). Liquidity hoarding. Theoretical Economics, 8(2), 291-324. https://doi.org/10.3982/TE1064