Working Paper: CEPR ID: DP16528
Authors: Diemo Dietrich; Thomas Gehrig
Abstract: We establish that the provision of intertemporal liquidity is fundamentally prone to instability. Not only are banks subject to coordination failures but also asset markets are inherently unstable. These findings challenge the notion of optimal private provision of liquidity.
Keywords: liquidity provision; instability; incomplete markets
JEL Codes: D15; D52; E22; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coordination failures (P11) | instability in liquidity provision (E44) |
| coordination failures (P11) | early withdrawals by patient consumers (D16) |
| instability in liquidity provision (E44) | instability in asset markets (E44) |