Money Markets Liquidity

Sanford J. Grossman · Laurence Weiss

Grossman and Weiss build a transactions-based model of money demand -- a hybrid of Clower's (1967) cash-in-advance constraint and the Baumol-Tobin inventory-theoretic approach -- in which going to the …

Sang Rae Kim

This paper studies when a bank is more effective as a supplier of privately produced money-like safe assets (repo, commercial paper), finding that a bank produces safer, more liquid assets when (1) …

Douglas W. Diamond · Philip H. Dybvig

A three-period model in which households face a privately observed, uninsurable risk of needing to consume early, and where a demand deposit contract lets banks share that risk better than any market …

Alfred Wong · Jiayue Zhang

Cross-currency basis swap spreads are widely read as a post-crisis anomaly in which covered interest parity has broken down; this paper argues the opposite -- that a swap dealer who priced a …

Wenxin Du · Jesse Schreger

A Handbook chapter reviewing the breakdown of covered interest rate parity during the Global Financial Crisis and its persistence through the following decade -- how the cross-currency basis is …

Markus K. Brunnermeier

Brunnermeier explains how a few hundred billion dollars of mortgage-market losses amplified into the 2007-08 financial crisis, which wiped out roughly $8 trillion in U.S. stock market wealth.

Wenxin Du · Alexander Tepper · Adrien Verdelhan

Covered interest rate parity, the no-arbitrage cornerstone of currency forward pricing, is shown to be systematically and persistently violated among G10 currencies after the 2008 crisis, in ways that …

Daniel Barth · R. Jay Kahn

The U.S. Treasury market is the deepest and most liquid fixed-income market in the world, yet in March 2020 it experienced unprecedented dysfunction—widening bid-ask spreads, skyrocketing repo rates, …

Rodney J. Garratt · Zhentong Lu · Phoebe Tian

This paper uses detailed transaction-level data from Canada's new high-value payment system (HVPS) to show how participants save liquidity by strategically exploiting the gridlock resolution …

Fernando Alvarez · Robert E. Lucas · Warren E. Weber

Reconciling the consensus view that raising short rates fights inflation with the quantity-theoretic evidence that inflation and interest rates move together with money growth in the long run, this …

Vittorio Grilli · Nouriel Roubini

This 1992 Journal of International Economics paper by Vittorio Grilli and Nouriel Roubini builds a two-country extension of Lucas's (1988) cash-in-advance model of asset-market liquidity, in which …

Lawrence J. Christiano · Martin Eichenbaum

Christiano and Eichenbaum confront a specific shortcoming of the general-equilibrium "liquidity effect" models that had recently been developed to explain why an expansionary monetary shock drives …

Ricardo Lagos

The cashless-limiting result in Woodford (1998) — that as money velocity diverges the allocation of a monetary economy converges to that of the corresponding economy without money — is the theoretical …

Fiorella De Fiore · Marie Hoerova · Ciaran Rogers · Harald Uhlig

The paper studies the euro area interbank money markets during the global financial crisis (2007–09) and sovereign debt crisis (2010–15), documenting four empirical regularities and building a …

Fernando Alvarez · Andrew Atkeson · Patrick J. Kehoe

Alvarez, Atkeson, and Kehoe build a cash-in-advance model in which households face a fixed real cost to transfer funds between a goods market and an asset market, so that in any period only a fraction …

Marianna Blix Grimaldi · Alberto Crosta · Dong Zhang

This paper uses transaction-level bond data under MiFID I and II to measure five dimensions of Swedish government bond market liquidity during the Riksbank's QE program (2015–2020) and identifies two …