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  Outside Liquidity, Rollover Risk, and Government Bonds

Luck, S., & Schempp, P. (2014). Outside Liquidity, Rollover Risk, and Government Bonds.

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 Creators:
Luck, Stephan1, Author              
Schempp, Paul1, Author              
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1Max Planck Institute for Research on Collective Goods, Max Planck Society, ou_2173688              

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 Abstract: This paper discusses whether financial intermediaries can optimally provide liquidity, or whether the government has a role in creating liquidity by supplying government securities. We discuss a model in which intermediaries optimally manage liquidity with outside rather than inside liquidity: instead of holding liquid real assets that can be used at will, banks sell claims on long-term projects to investors. While increasing efficiency, liquidity management with private outside liquidity is associated with a rollover risk. This rollover risk either keeps intermediaries from providing liquidity optimally, or it makes the economy inherently fragile. In contrast to privately produced claims, government bonds are not associated with coordination problems unless there is the prospect that the government may default. Therefore, efficiency and stability can be enhanced if liquidity management relies on public outside liquidity.

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 Dates: 2014
 Publication Status: Published in print
 Pages: -
 Publishing info: Bonn : Max Planck Institute for Research on Collective Goods
 Table of Contents: -
 Rev. Type: -
 Identifiers: Other: 2014/14
 Degree: -

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