Title: Inside and outside liquidity /
Authors: Holmström, Bengt.; Tirole, Jean.
Publisher: MIT Press,
Year: 2011
Subjects: Liquidity (Economics)
Abstract: "Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. In Inside and Outside Liquidity, leading economists Bengt Holmstrom and Jean Tirole offer an original, unified perspective on these questions drawing on insights from modern corporate finance. In a slight, but important departure from the standard theory of finance, they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective, private risk sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions. In an epilogue, Holmstrom and Tirole show how their theory can be used to understand some aspects of the recent financial crisis"--Jacket.
Contents: Leverage -- A simple model of liquidity demand -- Aggregate liquidity shortages and liquidity premia -- A liquidity asset pricing model (LAPM) -- Public provision of liquidity in a closed economy -- Liquidity provision with access to global capital markets -- Financial muscle and overhoarding of liquidity -- Specialized inputs and secondary markets -- Epilogue: summary and concluding thoughts on the subprime crisis.