Inside and Outside Liquidity

by Bengt Holmström, Jean Tirole

Series: The MIT Press

Subject categories
ISBNs
  • 0262294788
  • 9780262015783
  • 9780262294782

Two leading economists develop a theory explaining the demand for and supply of liquid assets.

Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one.

In Inside and Outside Liquidity, leading economists Bengt Holmström and Jean Tirole offer an original, unified perspective on these questions. In a slight, but important, departure from the standard theory of finance, they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective, private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.

  • The MIT Press; January 2011
  • ISBN: 9780262294782
  • Read online, or download in secure PDF format
  • Title: Inside and Outside Liquidity
  • Series: The MIT Press
  • Author: Bengt Holmström; Jean Tirole
  • Imprint: The MIT Press
Subject categories
ISBNs
  • 0262294788
  • 9780262015783
  • 9780262294782
Subject categories
ISBNs
  • 0262294788
  • 9780262015783
  • 9780262294782