Liquidity in the economy and in the banking system

Abstract

Increasing uncertainties have made the need for liquidity a pervasive element of every aspect of modern economic activity and a predominant feature of our time. Thus, the problem of liquidity has reached beyond the limits of the interests of the firm, and now ranks among the central problems of the modus operandi of the economic system. The present article analyses the twofold effect (on the level of production and on the structure of the productive apparatus), together with the corresponding twofold cost, of liquidity preference and of liquidity requirements. According to the author, both the retarding and depressing effects of liquidity requirements have been unduly overestimated and generalised. In his opinion, these effects - save in periods of recession - will find effective “natural” correctives through the mechanism of a credit economy and, above all, through the activities of the banking system.

JEL: E51