The Role of Liquidity in Financial Crises
نویسندگان
چکیده
The purpose of this paper is to use insights from the academic literature on crises to understand the role of liquidity in the current crisis. We focus on four of the crucial features of the crisis that we argue are related to liquidity provision. The first is the fall of the prices of AAA-rated tranches of securitized products below fundamental values. The second is the effect of the crisis on the interbank markets for term funding and on collateralized money markets. The third is fear of contagion should a major institution fail. Finally, we consider the effects on the real economy. * Prepared for the 2008 Jackson Hole Symposium, August 21-23, 2008 on Maintaining Stability in a Changing Financial System. We are grateful to Alessio De Vincenzo of the Bank of Italy for numerous helpful discussions and to our discussant Peter Fisher. Radomir Todorov and Zhenrui Tang provided excellent research assistance. ** Email: [email protected]. *** Email: [email protected]; and, from October 1, 2008, [email protected]. 1
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allen and carletti provide an insightful review of the literature on liquidity and financial crises and a useful framework for considering the role of liquidity in the events of the past year. i find myself in fundamental agreement with what i take to be their two key points: first, on liquidity hoarding as the more significant explanation of the breakdown in interbank markets and, second, on t...
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