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Full-Text Articles in Social and Behavioral Sciences
Non-Monotone Liquidity Under-Supply, Ana Fostel, John Geanakoplos
Non-Monotone Liquidity Under-Supply, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
We define liquidity as the flexibility to move goods (money) from one project (investment) to another. We show that credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. In this respect liquidity is like a commodity: according to our offsetting distortions principle, a distortion in the demand for any good can often be understood as an inefficiency of supply. We show that the liquidity under-supply is a non-monotone function of the credit constraint. This result is also a particular …
Collateral Restrictions And Liquidity Under-Supply: A Simple Model, Ana Fostel, John Geanakoplos
Collateral Restrictions And Liquidity Under-Supply: A Simple Model, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.