Market and Public Liquidity

The model developed here is set up to address two issues that have been at the core of the current crisis. The first issue is the originate-and-distribute model of financial intermediation, what the underlying economic rationale for this model might be (if there is any), and how it might affect optimal liquidity provision. A new explanation is proposed for origination and contingent distribution based on maturity shocks and the optimal allocation of long-term assets in the hands of long-term investors. The second issue concerns the dynamics of liquidity crises and the optimal timing of public liquidity.