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The Liquidity Model

In: Capital Wars

Author

Listed:
  • Michael J. Howell

    (CrossBorder Capital Ltd.)

Abstract

We use the discipline of flow of funds accounting to define liquidity algebraically from the standard budget constraint. By rearranging the expression for the private sector’s net acquisition of financial assets, we derive a formula for gross flows that splits out aggregate sources from the uses of liquidity. The model aligns with existing analyses of inside and outside money. It also shows that the main focus of traditional monetarism, namely bank deposits, is a use of funds rather than a source of funds. We argue that the aggregate inside plus outside money determines the size of maturity spreads, whereas the differential between inside and outside money flows determines credit spreads and the value of the exchange rate.

Suggested Citation

  • Michael J. Howell, 2020. "The Liquidity Model," Springer Books, in: Capital Wars, chapter 0, pages 55-58, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-39288-8_4
    DOI: 10.1007/978-3-030-39288-8_4
    as

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