Inside and Outside Liquidity

Book Details:

• Publisher: MIT Press

• Author: Bengt Holmström

• Language: English

• Edition: New

• ISBN: 9780262015783

• Pages: 288

• Cover: Hardcover

• Dimensions: 9.1 x 6.1 x 0.9 inches

About the Book:

In Inside and Outside Liquidity, leading economists Bengt Holmström and Jean Tirole present an insightful exploration of liquidity in financial systems, tackling questions that lie at the heart of financial crises, including the current global financial challenges. The authors investigate why financial institutions, corporations, and households hold low-yielding liquid assets like Treasury bills and money balances, and when and how state and international markets can compensate for a lack of liquidity to enhance savings and risk-sharing capabilities.

Taking a unique approach to the traditional theory of finance, Holmström and Tirole argue that the imperfect pledgeability of corporate income creates a demand for liquidity, leading to shortages that have significant consequences on asset pricing, investment strategies, and liquidity management. They emphasize the essential role of government intervention in managing risk-sharing between consumers with limited commitment power and firms facing high costs due to potential liquidity shortages.

By challenging the conventional perspective on private risk-sharing and its limitations, the authors illustrate how such imperfections often precipitate financial crises, which can be mitigated through proactive government interventions. This book provides a fresh and unified view of liquidity issues, offering valuable insights for economists, policymakers, and anyone interested in understanding the dynamics of financial markets and crises.