Real liquidity refers to the real purchasing power of the monetary base. In an economy where banks only take money as deposits, insufficient real liquidity constrains the price level when there is a liquidity shock before banks settle their long-term loan contracts. This leads to strictly...

Liquidity requirements for commercial banks improve risk-sharing for depositors. Nevertheless, shadow banks, issuing securities with lower liquidity, operate outside such regulatory constraints. In an economy featuring shadow banks with a constant level of liquidity for shadow bank securities,...

When "confidence" is lost, "liquidity dries up." We investigate the meaning of "confidence" and "liquidity" in the context of the current financial crisis. The financial crisis is a manifestation of an age-old problem with private money creation, banking panics. We explain this and provide some...