Keep liquidity provision loose during shocks – ECB study
Central banks can lessen harm to economy by reducing liquidity premium, say authors
Central banks should provide liquidity during periods of macroeconomic shock to prevent larger-than-necessary effects pummelling economies, a study by the European Central Bank (ECB) concludes.
The research bulletin by Davide Porcellacchia and Kevin Sheedy says that during shocks, banks increase their demand for liquid assets, such as US Treasuries, thereby pushing up the assets’ prices.
During such periods, the liquidity premium – the cost of holding liquid assets – also begins to play a role
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