Liquidity, Efficiency, and Bank Bailouts

Gary Gorton; Lixin Huang

doi:10.1257/0002828041464650

Liquidity, Efficiency, and Bank Bailouts

¹ The Wharton School, University of Pennsylvania, Philadelphia, PA 19041, and NBER. · ² Department of Economics and Finance, City University of Hong Kong, 88 Tat Chee Avenue, Kowloon, Hong Kong.

American Economic Review 2004

Governments can efficiently provide liquidity, as when the banking system is bailed out. We study a model in which not all assets can be used to purchase all other assets at every date. Agents sometimes want to sell projects. The market price of the projects sold depends on the supply of liquidity, which is determined in general equilibrium. While private liquidity provision is socially beneficial since it allows valuable reallocations, it is also socially costly since liquidity suppliers could have made more efficient investments ex ante. There is a role for the government to supply liquidity by issuing government securities.

DOI: 10.1257/0002828041464650
Volume: 94 (3)
Pages: 455-483
Language: en
Export: BibTeX
Sources: crossref openalex