Inside and Outside Liquidity

<b>Two leading economists develop a theory explaining the demand for and supply of liquid assets.</b><p>Why do financial institutions industrial companies and households hold low-yielding money balances Treasury bills and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets allowing agents to save and share risk more effectively? These questions are at the center of all financial crises including the current global one.</p><p>In <i>Inside and Outside Liquidity</i> leading economists Bengt Holmstr&#246;m and Jean Tirole offer an original unified perspective on these questions. In a slight but important departure from the standard theory of finance they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets investment decisions and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.</p>