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. …