The Liquidity Effect In Bank-Based And Market-Based Financial Systems

This paper assesses how the financial system influences the strength of the liquidity effect in a calibrated limited participation model of the monetary transmission mechanism. The model suggests that bank based systems should be characterized by smaller liquidity effects since monetary injections are spread out over a larger number of firms. This paper analyzes the link between the financial system and the strength of the liquidity effect in a limited participation model. The model suggests that bank-based financial systems should be associated with smaller liquidity effects than market-based systems. Intuitively, in a bank-based system a large number of firms depend on bank loans.