Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/102673 
Year of Publication: 
2014
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods No. 2014/14
Publisher: 
Max Planck Institute for Research on Collective Goods, Bonn
Abstract: 
This paper discusses whether financial intermediaries can optimally provide liquidity, or whether the government has a role in creating liquidity by supplying government securities. We discuss a model in which intermediaries optimally manage liquidity with outside rather than inside liquidity: instead of holding liquid real assets that can be used at will, banks sell claims on long-term projects to investors. While increasing efficiency, liquidity management with private outside liquidity is associated with a rollover risk. This rollover risk either keeps intermediaries from providing liquidity optimally, or it makes the economy inherently fragile. In contrast to privately produced claims, government bonds are not associated with coordination problems unless there is the prospect that the government may default. Therefore, efficiency and stability can be enhanced if liquidity management relies on public outside liquidity.
Subjects: 
liquidity provision
liquidity mismatch
bank run
roll-over freeze
outside liquidity
government bonds
liquidity regulation
JEL: 
G21
G28
H81
H63
Document Type: 
Working Paper

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