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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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Liquidity Provision with Access to Global Capital Markets

Liquidity Provision with Access to Global Capital Markets

(p.144) (p.145) 6 Liquidity Provision with Access to Global Capital Markets
Inside and Outside Liquidity

Holmström Bengt

Tirole Jean

The MIT Press

This chapter examines an economy which has free access to global financial and goods markets. Findings revealed that international markets will provide enough insurance if there is sufficient international collateral. It then shows that insurance will be incomplete even when there is full parity between domestic and international liquidity. The decision to supply liquidity in a state is determined by comparing state-contingent liquidity premia with the opportunity cost of providing liquidity in that state.

Keywords:   collateral, liquidity, economy, international markets, insurance

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