Affiliation:
1. Université Paris-Dauphine , France
2. Swiss National Bank , Switzerland
Abstract
Abstract
We characterize the interaction between banks’ liquid assets purchases and deposit issuance decisions. Using global games, we derive a liquidity multiplier: the amount of deposits a bank can create when endowed with one additional unit of liquid asset to maintain a given level of liquidity risk. In our central theorem, we prove it is larger than unity. This entails that banks have a special role in enhancing liquidity provision, “multiplying” liquid assets into a larger quantity of deposits. Our theory has implications for banks’ balance sheet choices, the pricing of liquid securities, and the role of public liquidity provision.
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Finance,Accounting
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