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Inside and Outside Liquidity$
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Bengt Holmstrom and Jean Tirole

Print publication date: 2011

Print ISBN-13: 9780262015783

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262015783.001.0001

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Aggregate Liquidity Shortages and Liquidity Premia

Aggregate Liquidity Shortages and Liquidity Premia

(p.65) 3 Aggregate Liquidity Shortages and Liquidity Premia
Inside and Outside Liquidity

Holmström Bengt

Tirole Jean

The MIT Press

This chapter presents how a shortage of liquidity can naturally arise from limited pledgability of income. It shows how the familiar limitations on debt capacity of firms are closely related to the much less explored limitations in the funding capacity of investors. This supply problem happened because the production of goods also served as a collateral function. The chapter also showed that when the productive sectors act as a net lender, there is always a shortage of aggregate liquidity. When the corporate sector is a net borrower, the presence of aggregate liquidity will depend on the stochastic structure of the liquidity shocks of the firms.

Keywords:   liquidity, collateral function, debt capacity, income, corporate sector

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