Title

Collateral Restrictions and Liquidity Under-Supply: A Simple Model

Document Type

Discussion Paper

Publication Date

7-1-2004

CFDP Number

1468R

CFDP Revision Date

2006-08-01

CFDP Pages

31

Abstract

We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.

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