β Scribed by HolmstrΓΆm, Bengt;Tirole, Jean
No coin nor oath required. For personal study only.
Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. InInside and Outside Liquidity, leading economists Bengt Holmstrom and Jean Tirole offer an original, unified perspective on these questions. In a slight, but important, departure from the standard theory of finance, they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective, private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.
Cover......Page 1
Contents......Page 6
Acknowledgments......Page 8
Prologue......Page 10
I Basics of Leverage and Liquidity......Page 18
1 Leverage......Page 24
2 A Simple Model of Liquidity Demand......Page 36
II Complete Markets......Page 70
3 Aggregate Liquidity Shortages and Liquidity Premia......Page 74
4 A Liquidity Asset Pricing Model (LAPM)......Page 98
III Public Provision of Liquidity......Page 124
5 Public Provision of Liquidity in a Closed Economy......Page 130
6 Liquidity Provision with Access to Global Capital Markets......Page 154
IV Waste of Liquidity and Public Policy......Page 174
7 Financial Muscle and Overhoarding of Liquidity......Page 178
8 Specialized Inputs and Secondary Markets......Page 208
Epilogue......Page 236
Bibliography......Page 252
Index......Page 260
Economics
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Two leading economists develop a theory explaining the demand for and supply of liquid assets.
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