@article{a869f6031af7414b88cc91b30ca01b8a,
title = "A theory of liquidity and regulation of financial intermediation",
abstract = "This paper studies a Diamond-Dybvig model of providing insurance against unobservable liquidity shocks in the presence of unobservable trades. We show that competitive equilibria are inefficient. A social planner finds it beneficial to introduce a wedge between the interest rate implicit in optimal allocations and the economy's marginal rate of transformation. This improves risk sharing by reducing the attractiveness of joint deviations where agents simultaneously misrepresent their type and engage in trades on private markets. We propose a simple implementation of the optimum that imposes a constraint on the portfolio share that financial intermediaries invest in short-term assets.",
author = "Emmanuel Farhi and Mikhail Golosov and Aleh Tsyvinski",
note = "Funding Information: Acknowledgements. Golosov and Tsyvinski acknowledge support by the National Science Foundation. Golosov thanks University of Chicago, Ente “Luigi Einaudi”, and Minneapolis Fed for hospitality. Tsyvinski thanks Ente “Luigi Einaudi” for hospitality. We are grateful to the editor Bruno Biais and three anonymous referees for detailed comments. We are especially grateful to one of the referees who provided exceptionally detailed comments. We also thank Daron Acemoglu, Stefania Albanesi, Franklin Allen, Marios Angeletos, Ricardo Caballero, V. V. Chari, Georgy Egorov, Ed Green, Christian Hellwig, Skander Van den Heuvel, Bengt Holmstr{\"o}m, Oleg Itskhoki, Guido Lorenzoni, Chris Phelan, Bernard Salani{\'e}, Jean Tirole, Ivan Werning, and Ruilin Zhou for comments. We thank the audiences at the Bank of Canada, Harvard, MIT, Minneapolis Federal Reserve, Society of Economic Dynamics, UT Austin, and Wharton for useful comments.",
year = "2009",
doi = "10.1111/j.1467-937X.2009.00540.x",
language = "English (US)",
volume = "76",
pages = "973--992",
journal = "Review of Economic Studies",
issn = "0034-6527",
publisher = "Oxford University Press",
number = "3",
}