American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Public Liquidity and Financial Crises
American Economic Journal: Macroeconomics
vol. 17,
no. 2, April 2025
(pp. 245–84)
Abstract
This paper studies the equilibrium effect of public liquidity on financial crises. Banks borrow from households via insured deposits and partially runnable debt and suffer endogenous funding withdrawals from households in crises. Holding public liquidity alleviates banks' liquidity problems. In equilibrium, a larger public liquidity supply reduces crisis severity and expands bank lending but crowds bank deposits and increases bank vulnerability to real shocks. The model quantitatively explains 40 percent of Treasury liquidity premium variations. Counterfactual analyses reveal that QE1 significantly improves output, 20 times larger than QE3. However, QE policies raise bank fragility against nonfinancial shocks such as COVID-19.Citation
Li, Wenhao. 2025. "Public Liquidity and Financial Crises." American Economic Journal: Macroeconomics 17 (2): 245–84. DOI: 10.1257/mac.20210412Additional Materials
JEL Classification
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages