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How should governments create liquidity?

Author

Listed:
  • Jackson, Timothy
  • Pennacchi, George
Abstract
Safe assets (liquidity) can be created by an economy’s private banking system and also by its government. Our model shows that some banks create liquidity with low debt and efficient loan monitoring while other banks use high, tranched debt and inefficient loan monitoring. Government liquidity can also differ, either by the government directly issuing debt or by insuring bank deposits. Directly issued government debt allows for greater private liquidity, more efficient bank lending, and greater welfare for savers. Government insurance of bank deposits crowds out private liquidity but leads to greater bank lending and profits.

Suggested Citation

  • Jackson, Timothy & Pennacchi, George, 2021. "How should governments create liquidity?," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 281-295.
    • Handle: RePEc:eee:moneco:v:118:y:2021:i:c:p:281-295
    DOI: 10.1016/j.jmoneco.2021.01.001
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    References listed on IDEAS

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    Cited by:

    1. Dirk Niepelt, 2024. "Money and Banking with Reserves and CBDC," Journal of Finance, American Finance Association, vol. 79(4), pages 2505-2552, August.
    2. Ngo, Vu Minh & Van Nguyen, Phuc & Nguyen, Huan Huu & Thi Tram, Huong Xuan & Hoang, Long Cuu, 2023. "Governance and monetary policy impacts on public acceptance of CBDC adoption," Research in International Business and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Liquidity creation; Government debt; Deposit insurance;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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