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The Elastic Provision of Liquidity by Private Agents
Author(s) -
SAUNDERS DREW
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00262.x
Subject(s) - market liquidity , fungibility , shock (circulatory) , investment (military) , monetary economics , purchasing , business , aggregate (composite) , economics , liquidity risk , supply shock , finance , monetary policy , medicine , materials science , politics , political science , law , composite material , marketing
I study a model of investment by financially constrained firms that are heterogeneous with respect to their exposure to an aggregate liquidity shock. A firm that is susceptible to the shock will mitigate its exposure by purchasing claims issued by a firm that is not. Liabilities of an unaffected firm may earn a liquidity premium due to their fungibility, and because they are backed by productive investment, their supply is elastic to the demand. This segmentation implies that an aggregate liquidity shock has different consequences across sectors of the economy.