Financial crises have been pervasive for many years. Their frequency in recent decades has been double that of the Bretton Woods Period (1945-1971) and the Gold Standard Era (1880-1993), comparable only to the period during the Great Depression. Nevertheless, the financial crisis that started in the summer of 2007 came as a great surprise to most people. What initially was seen as difficulties in the U.S. subprime mortgage market, rapidly escalated and spilled over first to financial markets and then to the real economy. The crisis changed the financial landscape worldwide and its full costs are yet to be evaluated. One important reason for the global impact of the 2007-2009 financial crisis was massive illiquidity in combination with an extreme exposure of many financial institutions to liquidity needs and market conditions. As a consequence, many financial instruments could not be traded anymore, investors ran on a variety of financial institutions particularly in wholesale markets, financial institutions and industrial firms started to sell assets at fire sale prices to raise cash, and central banks all over the world injected huge amounts of liquidity into financial systems. But what is liquidity and why is it so important for firms and financial institutions to command enough liquidity? This book brings together classic articles and recent contributions to this important field of research. It is divided into five parts. These are (i) liquidity and interbank markets; (ii) the public provision of liquidity and regulation; (iii) money, liquidity and asset prices; (iv) contagion effects; (v) financial crises and currency crises. The aim is to provide a comprehensive coverage of role of liquidity in financial crises.
1. An Introduction to Liquidity and Crises; FRANKLIN ALLEN, ELENA CARLETTI, JAN PIETER KRAHNEN, AND MARCEL TYRELL; SECTION 1: LIQUIDITY AND INTERBANK MARKETS; 2. Preference Shocks, Liquidity and Central Bank Policy; SUDIPTO BHATTACHARYA/DOUGLAS GALE (LONDON SCHOOL OF ECONOMICS/NEW YORK UNIVERSITY); W. BARNETT AND K. SINGLETON, EDS., NEW APPROACHES TO MONETARY ECONOMICS, CAMBRIDGE UNIVERSITY PRESS, 1987, PP. 69-88; 3. Endogenous Liquidity in Asset Markets; ANDREA EISFELDT (NORTHWESTERN UNIVERSITY); JOURNAL OF FINANCE, FEBRUARY 2004, 59, PP.1-30; 4. Financial Intermediaries and Markets; FRANKLIN ALLEN/DOUGLAS GALE (THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA/NEW YORK UNIVERSITY); ECONOMETRICA, 72(4), JULY 2004, PP. 1023-106.1; 5. Financial Fragility, Liquidity and Asset Prices; FRANKLIN ALLEN/DOUGLAS GALE (THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA/NEW YORK UNIVERSITY); JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION, 2(6), DECEMBER 2004, PP. 1015-1048; 6. Interbank Market Integration under Asymmetric Information; XAVIER FREIXAS/CORNELIA HOLTHAUSEN (UNIVERSITAT POMPEU FABRA, BARCELONA/EUROPEAN CENTRAL BANK, FRANKFURT); REVIEW OF FINANCIAL STUDIES, 18(2), SUMMER 2005, PP. 459-90; 7. Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Markets; CRAIG FURFINE (FEDERAL RESERVE BANK OF CHICAGO); JOURNAL OF BUSINESS, JANUARY 2001, 74, 33-57; SECTION 2: PUBLIC PROVISION OF LIQUIDITY AND REGULATION; 8. Private and Public Supply of Liquidity; BENGT HOLMSTROM/JEAN TIROLE (MIT/ UNIVERSITE SCIENCES SOCIALES, TOULOUSE); JOURNAL OF POLITICAL ECONOMY, FEBRUARY 1998, 106, PP.1-40; 9. Liquidity, Efficiency and Bank Bailouts; GARY GORTON/LIXIN HUANG (THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA/GEORGIA STATE UNIVERSITY); AMERICAN ECONOMIC REVIEW, 94(3), JUNE 2004, PP. 455-483; 10. Financial Crises, Payments System Problem and Discount Window Lending; MARK FLANNERY (UNIVERSITY OF FLORIDA); JOURNAL OF MONEY, CREDIT AND BANKING, NOVEMBER 1996, 28(4), PP. 804-824; 11. Liquidity, Risk Taking, and the Lender of Last Resort; RAFAEL REPULLO (CEMFI); INTERNATIONAL JOURNAL OF CENTRAL BANKING, 1, DECEMBER 2005, PP. 47-80; 12. Coordination Failures and the Lender of Last Resort: Was Bagehot Right after all?; JEAN-CHARLES ROCHET/XAVIER VIVES (UNIVERSITY SCIENCES SOCIALES, TOULOUSE/IESE, UNIVERSITY OF NAVARRA); JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION, 2(6), DECEMBER 2004, PP. 1116-47; 13. Competition among Regulators and Credit Market Integration; GIOVANNI DELL'ARICCIA/ROBERT MARQUEZ (IMF/ARIZONA STATE UNIVERSITY); JOURNAL OF FINANCIAL ECONOMICS, 79(2), FEBRUARY 2006, PP. 401-30; SECTION 3: MONEY, LIQUIDITY CRISES AND ASSET PRICES; 14. Money in a Theory of Banking; DOUGLAS DIAMOND/RAGHURAM RAJAN (UNIVERSITY OF CHICAGO); AMERICAN ECONOMIC REVIEW, 96(1), MARCH 2006, PP. 30-53; 15. Liquidity and Asset Prices; NOBUHIRO KIYOTAKI/JOHN MOORE (PRINCETON UNIVERSITY/UNIVERSITY OF EDINBURGH); INTERNATIONAL ECONOMIC REVIEW, 46(2), MAY 2005, PP. 317-49; 16. Collateral Constraints in a Monetary Economy; JUAN CORDOBA/MARLA RIPOLL (RICE UNIVERSITY/UNIVERSITY OF PITTSBURGH); JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION, 2(6), DECEMBER 2004, PP. 1172-1205; 17. Inefficient Credit Booms; GUIDO LORENZONI (MIT); REVIEW OF ECONOMIC STUDIES, 75(3), JULY 2008, PP. 809-833; SECTION 4: CONTAGION EFFECTS IN FINANCIAL CRISES; 18. Financial Contagion through Capital Connections: A Model of the Origin and Spread of Bank Panics; AMIL DASGUPTA (LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE); JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION, 2(6), DECEMBER 2004, PP. 1049-84; 19. Information Contagion and Bank Herding; VIRAL V. ACHARYA/TANJU YORULMAZER (LONDON BUSINESS SCHOOL/FEDERAL RESERVE BANK OF NEW YORK); JOURNAL OF MONEY, CREDIT AND BANKING, FEBRUARY 2008, 40(1), PP. 215-231; 20. Cash-in-the-market Pricing and Optimal Resolution of Bank Failures; VIRAL V. ACHARYA/TANJU YORULMAZER (LONDON BUSINESS SCHOOL/FEDERAL RESERVE BANK OF NEW YORK); REVIE
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