Liquidity risk, market power and the informational effects of policy

Open Access       

Authors: Grégory Claeys, Chara Papioti and Andreas Tryphonides

Journal of International Economics, Vol. 142, May, 2023

Using a structural approach, we combine bidding data from open market operations with macroeconomic information to recover the latent distribution of liquidity risk across financial institutions in Chile and how it is affected by policy. We find that unanticipated shocks to foreign reserve accumulation and interest rates have significant effects on aggregate beliefs about a liquidity shock in the near future. We demonstrate that accounting for market power is important for measuring the strength of this informational channel of macroeconomic policy.

This paper originally appeared as Barcelona School of Economics Working Paper 1206