Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/154162 
Authors: 
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper No. 1729
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper argues that counter-cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles. It develops a dynamic stochastic general equilibrium model in which banks operate subject to agency problems and funding liquidity risk in their inter- mediation activity. Importantly, the amount of liquidity reserves held in the financial sector is determined endogenously: Balance sheet constraints force banks to trade off insurance against funding outflows with loan scale. A financial crisis, simulated as an abrupt decline in the collateral value of bank assets, triggers a flight to liquidity, which strongly amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession. The paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks' asset portfolios.
Subjects: 
bank capital channel
credit crunch
funding liquidity risk
liquidity hoarding
macro-finance
JEL: 
E22
E32
E44
ISBN: 
978-92-899-1137-5
Document Type: 
Working Paper

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