Open AccessLiquidity hoarding
Author(s) -
Gale Douglas,
Yorulmazer Tanju
Publication year - 2013
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te1064
Subject(s) - market liquidity , hoarding (animal behavior) , inefficiency , liquidity crisis , bankruptcy , monetary economics , liquidity risk , incentive , lender of last resort , cash , business , economics , liquidity premium , finance , microeconomics , central bank , monetary policy , ecology , foraging , biology
Costly bankruptcy and incomplete markets cause inefficient liquidity hoarding. Banks are unable to trade contingent claims to liquidity, so they raise cash by selling illiquid assets on spot markets. Such trading increases asset‐price volatility and creates the incentive to hoard liquidity. Hoarding creates a second inefficiency: the aggregate level of liquidity is inefficient too. A lender of last resort can implement the constrained‐efficient allocation, but only if it intervenes so aggressively that it shuts down the private provision of liquidity altogether, becoming in effect the lender of first resort.