Private and Public Supply of Liquidity
Bengt Holmstrom,Jean Tirole +1 more
TLDR
In this paper, the authors address the question: Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the state have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means?Abstract:
This paper addresses a basic, yet unresolved, question: Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the state have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means? In our model, firms can meet future liquidity needs in three ways: by issuing new claims, by obtaining a credit line from a financial intermediary, and by holding claims on other firms. When there is no aggregateuncertainty, we show that these instruments are sufficient for implementing the socially optimal (second‐best) contract between investors and firms. However, the implementation may require an intermediary to coordinate the use of scarce liquidity, in which case contracts with the intermediary impose both a maximum leverage ratio and a liquidity constraint on firms. When there is only aggregate uncertainty, the private sector cannot satisfy its own liquidity needs. The government ca...read more
Citations
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Market Liquidity and Funding Liquidity
TL;DR: In this article, the authors provide a model that links a security's market liquidity and traders' funding liquidity, i.e., their availability of funds, to explain the empirically documented features that market liquidity can suddenly dry up (i) is fragile), (ii) has commonality across securities, (iii) is related to volatility, and (iv) experiences “flight to liquidity” events.
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Deciphering the Liquidity and Credit Crunch 2007-08
TL;DR: The authors summarizes and explains the main events of the liquidity and credit crunch in 2007-08, starting with the trends leading up to the crisis and explaining how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.
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Deciphering the Liquidity and Credit Crunch 2007-2008
TL;DR: The financial market turmoil in 2007 and 2008 has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy as mentioned in this paper The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies at the same time the stock market capitalization of the major banks declined by more than twice as much.
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A model of unconventional monetary policy
TL;DR: The authors developed a quantitative monetary DSGE model with financial intermediaries that face endogenously determined balance sheet constraints and used the model to evaluate the effects of the central bank using unconventional monetary policy to combat a simulated financial crisis.
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The Cash Flow Sensitivity of Cash
TL;DR: In this paper, the authors empirically estimate the sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for their theory, and hypothesize that constrained firms should have a positive cash flow sensitivity, while unconstrained firms' cash savings should not be systematically related to cash flows.
References
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Bank Runs, Deposit Insurance, and Liquidity
TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
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Financial Intermediation, Loanable Funds, and The Real Sector
Bengt Holmstrom,Jean Tirole +1 more
TL;DR: In this article, an incentive model of financial intermediation in which firms as well as intermediaries are capital constrained is studied, and how the distribution of wealth across firms, intermediaries, and uninformed investors affects investment, interest rates, and the intensity of monitoring.
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Liquidation Values and Debt Capacity: A Market Equilibrium Approach
Andrei Shleifer,Robert W. Vishny +1 more
TL;DR: In this paper, the authors explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets and use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle.
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The Financial Accelerator and the Flight to Quality
TL;DR: In this paper, the authors interpret the financial accelerator as resulting from endogenous changes over the business cycle in the agency costs of lending, and show that borrowers facing high agency costs should receive a relatively lower share of credit extended (the flight to quality) and hence should account for a proportionally greater part of the decline in economic activity.
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Debt Maturity Structure and Liquidity Risk
TL;DR: The authors analyzes debt maturity structure for borrowers with private information about their future credit rating, and finds that the optimal maturity structure trades off a preference for short maturity due to expecting their credit rating to improve, against liquidity risk, which is the risk that a borrower will lose the nonassignable rents due to excessive liquidation incentives of lenders.