DP16528 On the Instability of Private Intertemporal Liquidity Provision

Author(s): Diemo Dietrich, Thomas Gehrig
Publication Date: September 2021
Keyword(s): incomplete markets, Instability, Liquidity Provision
JEL(s): D15, D52, E22, G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16528

We establish that the provision of intertemporal liquidity is fundamentally prone to instability. Not only are banks subject to coordination failures but also asset markets are inherently unstable. These findings challenge the notion of optimal private provision of liquidity.