Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104223
Authors: 
Illing, Gerhard
Cao, Jin
Year of Publication: 
2007
Series/Report no.: 
Munich Discussion Paper 2007-25
Abstract: 
The paper models the interaction between risk taking in the financial sector and central bank policy. It shows that in the absence of central bank intervention, the incentive of financial intermediaries to free ride on liquidity in good states may result in excessively low liquidity in bad states. In the prevailing mixed-strategy equilibrium, depositors are worse off than if banks would coordinate on more liquid investment. It is shown that public provision of liquidity improves the allocation, even though it encourages more risk taking (less liquid investment) by private banks.
Subjects: 
Liquidity Provision
Monetary Policy
Bank Runs
JEL: 
E5
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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