Private and public liquidity provision in over-the-counter markets

David Arseneau, David E. Rappoport W. () and Alexandros P. Vardoulakis ()
Additional contact information
David E. Rappoport W.: Federal Reserve Board
Alexandros P. Vardoulakis: Federal Reserve Board

Theoretical Economics, 2020, vol. 15, issue 4

Abstract: We show that trade frictions in OTC markets result in inefficient private liquidity provision. We develop a dynamic model of market-based financial intermediation with a two-way interaction between primary credit markets and secondary OTC markets. Private allocations are generically inefficient because investors and firms fail to internalize how their actions affect liquidity in secondary markets. This inefficiency can lead to liquidity that is suboptimally low or high compared to the second best, providing a rationale for the regulation and public provision of liquidity. Moreover, our model characterizes a transmission channel of quantitative easing or tightening operating through liquidity premia.

Keywords: Liquidity provision; market liquidity; over-the-counter markets; otc; quantitative easing; quantitative tightening; monetary policy normalization (search for similar items in EconPapers)
JEL-codes: E44 G18 G30 (search for similar items in EconPapers)
Date: 2020-11-19
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://econtheory.org/ojs/index.php/te/article/viewFile/20201669/29121/835 (application/pdf)

Related works:
Working Paper: Private and Public Liquidity Provision in Over-the-Counter Markets (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:3419

Access Statistics for this article

Theoretical Economics is currently edited by Simon Board, Todd D. Sarver, Juuso Toikka, Rakesh Vohra, Pierre-Olivier Weill

More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().