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CONSUMER DEMAND FOR LIQUIDITY 7th set of transparencies for ToCF

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

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  1. CONSUMER DEMAND FOR LIQUIDITY 7th set of transparencies for ToCF

  2. 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.

  3. DIAMOND-DYBVIG (1983) - MODEL AND VARIANTS I. Consumer demand:

  4. 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).

  5. Social optimum either or match maturities with consumptions if independent shocks

  6. not optimal to perfectly insure CRRA  1 cu'decreasing  Flattening of the yield curve.

  7. (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)

  8. Not true for more general preferences mutual fund equalizes only MRS; more conditions. Patients get

  9. 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.

  10. 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

  11. 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.

  12. ANTI-RUN POLICIES suspension of convertibility, credit line, LOLR, interbank and other liquidity markets.

  13. 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.

  14. 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).

  15. if • DEBT AS A LOW INFORMATION INTENSITY SECURITY Discussion.

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