Working Paper: CEPR ID: DP8525
Authors: Oliver Hart; Luigi Zingales
Abstract: We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector.
Keywords: banking; liquidity; money
JEL Codes: E41; E51; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of the banking sector (competitive vs. monopolistic) (D42) | amount of liquidity generated by the banking sector (E51) |
| competitive banking sector (G21) | excessive liquidity (E41) |
| monopolistic banking sector (G21) | insufficient liquidity (E41) |
| increased liquidity (E41) | equilibrium prices of goods (D41) |
| equilibrium prices of goods (D41) | benefits for suppliers (L14) |
| equilibrium prices of goods (D41) | harms for buyers (D18) |
| government intervention (O25) | restriction of private liquidity creation (E51) |