Hachem, Kinda Cheryl. <br/><br/>
Liquidity Rules and Credit Booms / 
Kinda Cheryl Hachem, Zheng Michael Song. 
 - Cambridge, Mass.  National Bureau of Economic Research  2016. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w21880 .
 - Working Paper Series (National Bureau of Economic Research)  no. w21880. .
<br/><br/> January 2016. 
<br/><br/> This paper shows that liquidity regulation can trigger unintended credit booms in the presence of interbank market power. We consider a price-setter and a continuum of price-takers who trade reserves after the realization of idiosyncratic liquidity shocks. The price-takers are endogenously less liquid and circumvent regulation by engaging in shadow banking, which leads to a reallocation of funding away from the more liquid price-setter. This reallocation channel underlies the credit boom. Endogenous responses in bank liquidity ratios also affect the magnitude of the boom. We discuss extensions of the model and illustrate its quantitative performance with an application to China. 
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