Abstract
Governments can efficiently provide liquidity, as when the banking system is bailed out. We study a model in which not all assets can be used to purchase all other assets at every date. Agents sometimes want to sell projects. The market price of the projects sold depends on the supply of liquidity, which is determined in general equilibrium. While private liquidity provision is socially beneficial since it allows valuable reallocations, it is also socially costly since liquidity suppliers could have made more efficient investments ex ante. There is a role for the government to supply liquidity by issuing government securities.
| Original language | English |
|---|---|
| Pages (from-to) | 455-483 |
| Journal | American Economic Review |
| Volume | 94 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - Jun 2004 |
Bibliographical note
Publication details (e.g. title, author(s), publication statuses and dates) are captured on an “AS IS” and “AS AVAILABLE” basis at the time of record harvesting from the data source. Suggestions for further amendments or supplementary information can be sent to [email protected].Funding
Huang acknowledges partial research funding provided by a grant from City University of Hong Kong.
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