Working Paper: NBER ID: w17299
Authors: Oliver D. 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: Liquidity; Banking; Market Equilibrium
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 |
|---|---|
| competitive banking sector (G21) | excessive liquidity (E41) |
| excessive liquidity (E41) | equilibrium prices increase (D59) |
| equilibrium prices increase (D59) | negative impact on consumers (F61) |
| monopolistic banking sector (G21) | insufficient liquidity (E41) |
| insufficient liquidity (E41) | negative impact on sellers (F69) |
| optimal liquidity level (E41) | intermediate competition (L13) |
| introduction of government money (E42) | crowding out of private liquidity (E51) |
| crowding out of private liquidity (E51) | deadweight losses through taxation (H21) |
| lack of double coincidence of wants (D52) | demand for safe assets (E41) |
| demand for safe assets (E41) | inefficient liquidity provision (E41) |