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Liquidity Management of Heterogeneous Banks during the Great Recession

Author

Listed:
  • Toshiaki Ogawa

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: toshiaki.ogawa@boj.or.jp))

Abstract
I construct a dynamic stochastic general equilibrium model to investigate how the liquidity management of different size banks responds to liquidity and loan demand shocks. My investigation shows the following. Compared with small banks, large banks tend to be net borrowers and thus more exposed to liquidity risk. In response to negative liquidity shocks, large banks decrease their credit supply while small ones increase theirs. In response to negative loan demand shocks, both large and small banks decrease their credit supply. Connecting these implications with the panel data, I argue that negative liquidity shocks served as the main driver of the Great Recession initially, and negative demand shocks did so later, and that demand shocks accounted for two thirds of the greatest fall in aggregate loans during the recession.

Suggested Citation

  • Toshiaki Ogawa, 2020. "Liquidity Management of Heterogeneous Banks during the Great Recession," IMES Discussion Paper Series 20-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:20-e-05
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    File URL: https://www.imes.boj.or.jp/research/papers/english/20-E-05.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ogawa, Toshiaki, 2022. "Welfare implications of bank capital requirements under dynamic default decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).

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    More about this item

    Keywords

    Great Recession; Bank liquidity management; Occasionally binding constraints; Heterogeneous bank model; General equilibrium model;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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