Chapter 9: Liquidity and Financial Intermediation
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7 Terms
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Key Concepts
Three period OLG Model
Capital is illiquid: payoff comes in period t+2
Money is liquid but has a lower return
Banks emerge due to frictions in direct lending
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Young Budget Constraint
c1,t + kt + vtmt <= y
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Middle Aged Budget Constraint
c2,t+1 + vt+1mt+1 ≤ vt+1mt
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Old Budget Constraint
c3,t+2 ≤ Xkt + vt+2mt+1
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Equilibrium Condition For Return
vt +2/vt = n²
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Maturity Transformation
banks borrow short (deposits) and lend long (capital)
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Wefare improving
if X>= r++1 * rt+2
Note 
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