the absence of central bank intervention, the incentive of financial intermediaries to free ride on liquidity in good … states may result in excessively low liquidity in bad states. In the prevailing mixed-strategy equilibrium, depositors are … worse off than if banks would coordinate on more liquid investment. It is shown that public provision of liquidity improves …

Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing …, 2008), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback … between lender of last resort policy and incentives of private banks, determining the aggregate amount of liquidity available …

Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing …, 2007), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback … between lender of last resort policy and incentives of private banks, determining the aggregate amount of liquidity available …

pure illiquidity risk. It is shown that, when bad states are highly unlikely, public provision of liquidity may improve the … an incentive of financial intermediaries to free ride on liquidity in good states, resulting in excessively low liquidity … more liquid investment. In that case, liquidity injection will make the free riding problem even worse. The results show …

prevent a 'run' on financial intermediation by injecting liquidity when asset values fall significantly. The inflationary side … a central bank to inject liquidity in a crisis. …

intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to financial crisis. Anticipating … central bank's reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering … efficient outcome can be implemented by imposing ex ante liquidity requirements. …

intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to financial crisis. Anticipating … central bank's reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering … cient outcome can be implemented by imposing ex ante liquidity requirements …