Inside and Outside Liquidity
Bengt Holmstrom and Jean Tirole
Abstract
Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. This book offers an original, unified perspective on these questions. In a slight, but significant, departure from the standard theory of finance, it shows how imperfect pledgeability of corpo ... More
Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. This book offers an original, unified perspective on these questions. In a slight, but significant, departure from the standard theory of finance, it shows how imperfect pledgeability of corporate income leads to a demand for, as well as a shortage of, liquidity, with implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. From this perspective, private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.
Keywords:
financial institutions,
industrial companies,
households,
money balances,
Treasury bills,
liquid assets,
international financial markets,
financial crises,
finance
Bibliographic Information
| Print publication date: 2011 |
Print ISBN-13: 9780262015783 |
| Published to MIT Press Scholarship Online: August 2013 |
DOI:10.7551/mitpress/9780262015783.001.0001 |
