Private money creation, liquidity crises, and government interventions

Benigno, Pierpaolo; Robatto, Roberto (2019). Private money creation, liquidity crises, and government interventions. Journal of monetary economics, 106, pp. 42-58. Elsevier 10.1016/j.jmoneco.2019.07.005

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The joint supply of public and private liquidity is examined when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to investing in low-risk projects always eliminates liquidity crises but reduces welfare. Under some conditions, deposit insurance gives rise to an equilibrium in which intermediaries that issue insured debt (i.e., traditional banks) coexist with others that issue uninsured debt (i.e., shadow banks), despite the two being ex ante identical.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Benigno, Pierpaolo

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

0304-3932

Publisher:

Elsevier

Language:

English

Submitter:

Dino Collalti

Date Deposited:

03 Apr 2020 15:23

Last Modified:

03 Apr 2020 15:31

Publisher DOI:

10.1016/j.jmoneco.2019.07.005

BORIS DOI:

10.7892/boris.142193

URI:

https://boris.unibe.ch/id/eprint/142193

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