Amplification mechanisms in liquidity crises
By: Arvind Krishnamurthy.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- working paper 15040; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15040.
Publisher: National Bureau of Economic Research
Published: 2009
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "I describe two amplifications mechanisms that operate during liquidity crises and discuss the scope for central bank policies during crises as well as preventive policies in advance of crises.  The first mechanism works through asset prices and balance sheets.  A negative shock to the balance sheets of asset-holders causes them to liquidate assets, lowering prices, further deteriorating balance sheets, culminating in a crisis.  The second mechanism involves investors' Knightian uncertainty.  Unusual shocks to untested financial innovations lead agents to become uncertain about their investments causing them to disengage from markets and increase their demand for liquidity.  This behavior leads to a loss of liquidity and a crisis"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/9/2009.

Includes bibliographical references.

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