Title

OUTSIDE AND INSIDE LIQUIDITY

Author(s)

PATRICK BOLTON PATRICK BOLTON (Columbia University)

TANO SANTOS TANO SANTOS (Columbia University)

JOSE A. SCHEINKMAN JOSE SCHEINKMAN (Princeton University)

Abstract

We propose an origination-and-contingent-distribution model of banking, in which liquidity demand by short-term investors can be met with cash reserves (inside liquidity) or sales of assets (outside liquidity) to long-term investors. Outside liquidity is a more efficient source, but asymmetric information about asset quality can introduce a friction in the form of excessively early asset trading in anticipation of a liquidity shock, excessively high cash reserves, and too little origination of assets by banks. The model captures elements of the current financial crisis and yields policy prescriptions on public liquidity provision to overcome liquidity crises.

Creation Date

2010-04

Section URL ID

ET

Paper Number

wp035_2012_Bolton_Santos_Scheinkman_Outside%20and%20Inside%20Liquidity.pdf

URL

http://detc.princeton.edu/wp-content/uploads/2016/11/wp035_2012_Bolton_Santos_Scheinkman_Outside-and-Inside-Liquidity.pdf

File Function

Jel

C52, E44, G12

Keyword(s)

Federal reserve, great recession, banking

Suppress

false

Series

10