This paper studies banks' liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate …

We consider a two-period market with persistent liquidity trading and risk averse privately informed investors who have … a one period horizon. With persistence, prices reflect average expectations about fundamentals and liquidity trading … equilibria which can be ranked in terms of liquidity, volatility, and informational efficiency. We establish the limits of the …

We show that the impact of government bailouts (liquidity injections) on a representative bank's risk taking depends on … decreases (increases) bank's risk taking. Second, the optimal liquidity policy itself depends on systematic risk. Third, the … relationship between bailouts and bank's risk taking is not monotonic. When systematic risk is low, the optimal liquidity policy is …

During the last decades a consensus has emerged that it is impossible to disentangle liquidity shocks from solvency …