• Open Access

Liquidity hoarding


  • Douglas Gale,

    1. Department of Economics, New York University; douglas.gale@nyu.edu
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  • Tanju Yorulmazer

    1. Federal Reserve Bank of New York; tanju.yorulmazer@ny.frb.org
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    • We thank Franklin Allen, Gadi Barlevy, Marco Bassetto, Markus Brunnermeier, Xavier Gabaix, David Martinez-Miera, Stephen Morris, Ned Prescott, Hyun Shin, Jeremy Stein, Anjan Thakor, Dimitri Vayanos, Vish Viswanathan, Wei Xiong, and seminar participants at the Board of Governors of the Federal Reserve System, the Boston University School of Management, the Centro de Estudios Monetarios y Financieros (CEMFI), the European Summer Symposium in Economic Theory (ESSET), the Federal Reserve Banks of New York, Philadelphia, and Chicago, the Fed Day Ahead Conference, Imperial College, the London School of Economics, Sabanci University, Seoul National University, Southern Methodist University, the Summer Workshop on Money, Banking, Payments, and Finance at the FRB of Chicago, the University of Chicago Booth School of Business, the University of Montreal, the University of Texas at Dallas, and the University of Western Ontario. Peter Hull provided excellent research assistance. The views expressed here are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System. All errors remain our own.


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.