Counter-cyclical liquidity hoarding could ‘strongly amplify' business cycles, according to ECB paper
Develops balance sheet channel of ‘shock transmission'
Counter-cyclical liquidity hoarding by financial intermediaries could "strongly amplify" business cycles, argues a European Central Bank (ECB) working paper, published today.
Flight to liquidity and the Great Recession, by Sören Radde, develops a dynamic stochastic general equilibrium model in which banks operate subject to agency problems and funding liquidity risk in their inter-mediation activity.
"Importantly, the amount of liquidity reserves held in the financial sector is determined
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