Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
1000393 | Journal of Financial Stability | 2007 | 15 Pages |
Abstract
This paper develops a model of banking fragility driven by aggregate liquidity shortages. Inefficiencies arise from a failure of the interbank market to smooth the available liquidity in such a shortage. We find that a standard lender of last resort policy is ineffective in restoring efficiency as it leads to offsetting changes in the banks’ supply of liquidity. In contrast, subsidizing the purchase of assets from troubled banks increases welfare by improving the banks’ liquidity holdings. The first best, however, is achieved by redistributing existing liquidity from healthy to troubled banks in a crisis.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics, Econometrics and Finance (General)
Authors
Wolf Wagner,