Inside and Outside Liquidity

ISBN-10: 0262518538
ISBN-13: 9780262518536
Edition: 2013
List price: $25.00
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Description: Why do financial institutions, industrial companies, and households hold low-yieldingmoney balances, Treasury bills, and other liquid assets? When and to what extent can the state andinternational financial markets make up for a shortage of liquid  More...

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Book details

List price: $25.00
Copyright year: 2013
Publisher: MIT Press
Publication date: 1/11/2013
Binding: Paperback
Pages: 264
Size: 6.00" wide x 9.00" long x 0.75" tall
Weight: 0.792
Language: English

Why do financial institutions, industrial companies, and households hold low-yieldingmoney balances, Treasury bills, and other liquid assets? When and to what extent can the state andinternational financial markets make up for a shortage of liquid assets, allowing agents to save andshare risk more effectively? These questions are at the center of all financial crises, includingthe current global one. In Inside and Outside Liquidity, leading economists BengtHolmström and Jean Tirole offer an original, unified perspective on these questions. In a slight,but important, departure from the standard theory of finance, they show how imperfect pledgeabilityof corporate income leads to a demand for as well as a shortage of liquidity with interestingimplications for the pricing of assets, investment decisions, and liquidity management. Thegovernment has an active role to play in improving risk-sharing between consumers with limitedcommitment power and firms dealing with the high costs of potential liquidity shortages. In thisperspective, private risk-sharing is always imperfect and may lead to financial crises that can bealleviated through government interventions.

Bengt Holmstr�m is Paul A. Samuelson Professor of Economics at MIT, where he was Head of the Economics Department from 2003 to 2006.

Jean Tirole, the 2014 Nobel Laureate in Economics, is Scientific Director of IDEI (Institut d'Economie Industrielle), Chairman of the Board of TSE (Toulouse School of Economics), and Annual Visiting Professor of Economics at MIT.

Acknowledgments
Prologue: Motivation and Roadmap
Basics of Leverage and Liquidity
Leverage
A Simple Model of Liquidity Demand
Complete Markets
Aggregate Liquidity Shortages and Liquidity Premia
A Liquidity Asset Pricing Model (LAPM)
Public Provision of Liquidity
Public Provision of Liquidity in a Closed Economy
Liquidity Provision with Access to Global Capital Markets
Waste of Liquidity and Public Policy
Financial Muscle and Overhoarding of Liquidity
Specialized Inputs and Secondary Markets
Epilogue: Summary and Concluding Thoughts on the Subprime Crisis
Bibliography
Index

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