Working Paper Series No 24 / September 2016 Macroprudential policy with liquidity panics

@inproceedings{GarciaMacia2016WorkingPS,
  title={Working Paper Series No 24 / September 2016 Macroprudential policy with liquidity panics},
  author={Daniel Garcia-Macia and A. Salazar Villacorta},
  year={2016}
}
We analyze the optimality of macroprudential policies in an environment where the role of the banking sector is to efficiently allocate liquid assets across firms. Informational frictions in the banking sector can lead to an interbank market freeze. Firms react to the breakdown of the banking system by inefficiently accumulating liquid assets by themselves. This reduces the demand for bank loans and bank profits, which further disrupts the financial sector and increases the probability of a… CONTINUE READING

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