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CONSUMER DEMAND FOR LIQUIDITY 7th set of transparencies for ToCF. Consumers, like firms, may face liquidity shocks. 3 topics: I. Financial institutions as liquidity pools : fundamental (no self-provision)
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CONSUMER DEMAND FOR LIQUIDITY 7th set of transparencies for ToCF
Consumers, like firms, may face liquidity shocks. 3 topics: I. Financial institutions as liquidity pools: fundamental (no self-provision) insurers (flatten term structure to reduce cost of impatience): more fragile! II. Runs III. Heterogenous consumers and security design.
DIAMOND-DYBVIG (1983) - MODEL AND VARIANTS I. Consumer demand:
Technological yield curve Intuitions: hoarding liquidity is costly, liquidity is wasted if no liquidity shock. Example: AUTARKY with (no dominance) Technological yield curve: Self-provision of liquidity is inefficient (Strong form: no financial markets at date 1, not only lack of planning at date 0).
Social optimum either or match maturities with consumptions if independent shocks
not optimal to perfectly insure CRRA 1 cu'decreasing Flattening of the yield curve.
(1) Deposit contract: can withdraw at date 1 or at date 2 IMPLEMENTATION (assume can be verified. See below). (2) Mutual fund invests dividend i1 at date 1. Impatients consume [i1+p] ( p = resale price)
Not true for more general preferences mutual fund equalizes only MRS; more conditions. Patients get
Here: bypass. Invest if patient: if impatient: resell to patient depositors (who then withdraw ). With can buy (%) of value R JACKLIN CRITIQUE General theme: markets conflict with optimal insurance. back to technological yield curve DD INSURANCE INCOMPATIBLE WITH EXISTENCE OF FINANCIAL MARKETS TO WHICH AGENTS HAVE ACCESS.
Analogies: insurance against liquidity shocks liquidity costly to create: return on ST investment < return on LT investment need right hoarding + dispatching VARIANTS autarky given strong meaning (no trading of claims in financial markets), incompatibility with financial markets, consumer’s LT claim fully pledgeable. Differences: (a) OLG: could have i1 = 0 (liquidity newcomers) Not IC, though: flat yield curve (b) Macroshocks: Hellwig 1994 on interest rate shocks. COMPARISON WITH CORPORATE LIQUIDITY DEMAND
RUNS Suppose now withdraw ( is an equilibrium) II. Suppose Preferences : if patient, if impatient (but has access to storage technology 1 1 between dates 1 and 2). receives if withdraws, if does not.
ANTI-RUN POLICIES suspension of convertibility, credit line, LOLR, interbank and other liquidity markets.
HETEROGENEOUS CONSUMER HORIZONS: GORTON - PENNACCHI (1990) (2) random and unobservable ( or ) “Potential liquidity traders” () “LT investors” (1-) III. Consumers have different probabilities of experiencing shock. DD with 3 twists: (1) R uncertain ( or ) not commonly observed at date 1.
To simplify, 2 states (3) Speculator (preferences ) : learns state at date 1, can buy shares. full pooling loss per potential liquidity trader • SUPPOSE ISSUE EQUITY order flow in state L: order flow in state H: = price discount (no such discount if only LT investors buy).
if • DEBT AS A LOW INFORMATION INTENSITY SECURITY Discussion.