We build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase...

There is empirical evidence that government actions and interventions prolonged and worsened the financial crisis, because they were based on faulty diagnosis of the problem and did not follow clear predictable principles.