-quality firms. Public liquidity support preserves the overall production capacity. However, by dampening the cleansing effects, it … the expectations of liquidity support that motivate low-quality firms to overinvest pre-crisis. Finally, the size of … on savings discourage firms from self-insurance against crises through internal liquidity accumulation …

, this set-up gives rise to an (il-)liquidity premium on non-eligible assets. Then, a quantitative easing policy, which …