CFDP 1468R

Collateral Restrictions and Liquidity Under-Supply: A Simple Model

Author(s): 

Publication Date: July 2004

Revision Date: August 2006

Pages: 31

Abstract: 

We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.

Keywords: 

Liquidity under-supply, Credit constraint, Non-monotonicity, Multiplier, Collateral equilibrium

JEL Classification Codes:  D51, E44, F30, G15

See CFP: 1236