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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:

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    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).
    3. Bidder, Rhys & Jackson, Timothy P. & Rottner, Matthias, 2024. "CBDC and banks: Disintermediating fast and slow," Discussion Papers 15/2024, Deutsche Bundesbank.
    4. Rhys Bidder & Timothy Jackson & Matthias Rottner, 2024. "CBDC and Banks: Disintermediating Fast and Slow," Working Papers 202407, University of Liverpool, Department of Economics.
    5. Beckmann, Lars & Debener, Jörn & Hark, Paul F. & Pfingsten, Andreas, 2024. "CBDC and the shadow of bank disintermediation: US stock market insights on threats and remedies," Finance Research Letters, Elsevier, vol. 67(PB).

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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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