The Elastic Provision of Liquidity by Private Agents
Article first published online: 15 SEP 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue 7, pages 1423–1451, October 2009
How to Cite
SAUNDERS, D. (2009), The Elastic Provision of Liquidity by Private Agents. Journal of Money, Credit and Banking, 41: 1423–1451. doi: 10.1111/j.1538-4616.2009.00262.x
Important work on macroeconomic implications of agency frictions includes that by Bernanke and Gertler (1989), , and .
I have benefited enormously from the help and support of Andres Almazan, Dean Corbae, Scott Freeman, and Bruce Smith. The comments of Deborah Lucas, an anonymous referee, and Jack Barron have helped me to improve the paper substantially. Thanks are due also to seminar participants at Purdue University, the University of Texas Departments of Economics and Finance, and the 2003 Midwest Macroeconomics Conference. All errors are my own. This essay was previously circulated under the title “Endogenous Liquidity Provision.”
- Issue published online: 15 SEP 2009
- Article first published online: 15 SEP 2009
- Received September 14, 2006; and accepted in revised form February 24, 2009.
- liquidity provision;
- liquidity elasticity
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.