【金融高端论坛】Optimal Liquidity Policy

　This paper presents a simple model of liquidity demand and supply. We show that competitive market forces fail to lead to efficient supply of liquidity, and that the inefficiency is present both in ex ante market design and in spot market participation. Therefore, policy intervention is needed both at the initial market design stage and in the spot market when liquidity shortage arises. We show that different policy interventions have different efficiency consequences under different market conditions. For example, while subsidizing liquidity providers ex ante (e.g., designated market makers) is generally efficient, the market liquidity might be too high especially when the probability of liquidity event is small; spot interventions that subsidize sellers (e.g., relaxing capital requirements, subsidizing loan modifications) is generally more effective at reducing the cost of default than subsidizing buyers (e.g., public-private partnership to purchase toxic assets), especially since subsidization to buyers in the spot market might hinder the incentives of market participants to provide liquidity ex ante.