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Thomas Gehrig, University of Vienna

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Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Tho­mas Gehrig from Uni­versity of Vi­enna to present his re­search pa­per.
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Spec­u­lat­ive and Pre­cau­tion­ary De­mand for Li­quid­ity in Com­pet­it­ive Bank­ing Mar­kets

We demon­strate that the co-ex­ist­ence of dif­fer­ent motives for li­quid­ity pref­er­ences pro­foundly af­fects the ef­fi­ciency of fin­an­cial in­ter­me­di­ation. Li­quid­ity pref­er­ences ar­ise be­cause con­sumers wish to take pre­cau­tions against sud­den and un­fore­seen ex­pendit­ure needs, and be­cause in­vestors want to spec­u­late on fu­ture in­vest­ment op­por­tun­it­ies. Without fur­ther fric­tions, the co-ex­ist­ence of these motives en­ables banks to gain ef­fi­cien­cies from com­bin­ing li­quid­ity in­sur­ance and credit in­ter­me­di­ation. With stand­ard fin­an­cial fric­tions, banks can­not reap such econom­ies of scope. Indeed, the co-ex­ist­ence of a pre­cau­tion­ary and a spec­u­lat­ive motive can cause ef­fi­ciency losses which would not oc­cur if there were only a single motive. Spe­cific­ally, if the ar­rival of prof­it­able fu­ture in­vest­ment op­por­tun­it­ies is suf­fi­ciently likely, such co-ex­ist­ence im­plies inef­fi­cient sep­ar­a­tion, pool­ing, or even non-ex­ist­ence of pure strategy equi­lib­ria. This sug­gests that policy im­plic­a­tions de­rived solely from a single motive for li­quid­ity de­mand can be fu­tile.

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