Quarterly Journal of Economics Vol. 126 No. 1 2011
Outside and Inside Liquidity
open access
Abstract
We propose an origination-and-contingent-distribution model of banking, in which liquidity demand by short-term investors (banks) can be met with cash reserves (inside liquidity) or sales of assets (outside liquidity) to long-term investors (hedge funds and pension funds). Outside liquidity is a more efficient source, but asymmetric information about asset quality can introduce a friction in the form of excessively early asset trading in anticipation of a liquidity shock, excessively high cash reserves, and too little origination of assets by banks. The model captures key elements of the financial crisis and yields novel policy prescriptions.
- DOI
- 10.1093/qje/qjq007
- Volume
- 126
- Issue
- 1
- Pages
- 259-321
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref