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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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Financial Muscle and Overhoarding of Liquidity

Financial Muscle and Overhoarding of Liquidity

Chapter:
(p.169) 7 Financial Muscle and Overhoarding of Liquidity
Source:
Inside and Outside Liquidity
Author(s):

Holmström Bengt

Tirole Jean

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262015783.003.0008

The chapter examines the reasons why firms may hoard too much liquidity. It stresses two points: firstly, the financial capability of the potential buyers increases the value of distressed assets, contributing to liquidity at a point called date one; secondly, uncoordinated purchases of short-term assets at a point called date zero can lead to excessive hoarding of liquidity. During a subprime crisis, banks kept large amounts of excess reserves at the central bank. This is in accordance with a strategy of strengthening their position to profit from fire sales of distressed assets. The chapter then examines a situation that can lead to a waste of liquidity due to a lack of coordination and government remedies that use two instruments: liquidity regulation and public provision of liquidity.

Keywords:   liquidity, hoarding, liquidity regulation, public provision of liquidity, assets

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