“Lemons, Liquidity Constraint and Liquidity Policy” by Feng Dong
Shanghai Jiaotong University
The 2007-2009 global financial crisis was mainly characterized by liquidity shortage. Motivated by flight to quality & liquidity during the Great Recession, one of the central questions on macro prudential policy is how to manage the provision of public liquidity in both conventional and unconventional way. To this end, we endogenize asset liquidity by developing a tractable dynamic model with information asymmetry on asset quality in a production economy. We then quantify the dynamic implications of conventional and unconventional liquidity policy for private liquidity as well as for social welfare.