Chapter 6. Conclusion
In the previous chapters we described a phenomenon—liquidity risk and liquidity shocks—whose effects work primarily through financial institutions. As a result, economic contractions that occur due to liquidity crises behave differently than standard recessions.
An obvious question that comes to mind is whether there are ways to lessen the effects of liquidity shocks. If a liquidity shock occurs in the financial markets, can public policy be used to mitigate its effects on financial markets and institutions as well as shield the nonfinancial sector of the economy? In this chapter, we deal briefly with this question as we conclude the book.
6.1 A Liquidity Crisis
A liquidity shock starts when there is a drop in the fundamental ...
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