Liquidity Requirements and Central Bank Interventions During Banking Crises.

This article analyzes two key liquidity policies—liquidity requirements and public liquidity injections—in the context of financial crises, using a theoretical model that incorporates near-money assets such as government debt and central bank reserves. It finds that these policies affect liquidity premia and the prices of liquid assets, producing heterogeneous impacts on agents depending on their holdings of liquid assets. Liquidity injections increase the supply of liquid assets, benefiting liquidity-poor households and producers but lowering asset prices and welfare for liquidity-rich households, while liquidity requirements restrict banks’ debt issuance, raising asset prices and benefiting liquidity-poor households but amplifying recessions and harming producers. Importantly, combining liquidity injections with liquidity requirements can neutralize opposing effects on asset prices, enabling Pareto improvements unattainable by either policy alone. The paper also extends the analysis to targeted liquidity injections (bailouts) and highlights the trade-offs and welfare implications of these interventions.