Liquidity Risk, Market Power and the Informational Effects of Policy

• BSE Working Paper: 1206 | October 20
• Keywords: liquidity risk , multi-unit auction , signalling effects of macroeconomic policy
• JEL codes: C57, D44, D80, E58, F30, G20
• liquidity risk
• multi-unit auction
• signalling effects of macroeconomic policy

Abstract. Using a structural approach, we combine bidding data from open market operations as well as 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.