Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104230
Authors: 
Sauer, Stephan
Year of Publication: 
2007
Series/Report no.: 
Munich Discussion Paper 2007-27
Abstract: 
This paper provides a framework to analyse emergency liquidity assistance of central banks on financial markets in response to aggregate and idiosyncratic liquidity shocks. The model combines the microeconomic view of liquidity as the ability to sell assets quickly and at low costs and the macroeconomic view of liquidity as a medium of exchange that influences the aggregate price level of goods. The central bank faces a trade-off between limiting the negative output effects of dramatic asset price declines and more inflation. Furthermore, the anticipation of central bank intervention causes a moral hazard effect with investors. This gives rise to the possibility of an optimal monetary policy under commitment.
Subjects: 
Liquidity shocks
Financial crises
Liquidity provision principle
Greenspan put
Optimal monetary policy intervention
JEL: 
E58
E44
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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