| Abstract: |
Our equilibrium model determines the liquidity premium offered by a
monopolistic bank to a pool of depositors made up of time-consistent and
time-inconsistent agents. Time-consistent depositors demand compensation for
illiquidity, whereas time-inconsistent ones are willing to forgo interest on
illiquid savings accounts to discipline their future selves. We show that
formal financial markets can reward time-inconsistent clients for illiquidity,
even though these agents would agree to pay for it. The explanation combines
two factors: the existence of reserve requirements making the bank keen to
reward illiquid accounts more than liquid ones, and the presence of
time-consistent agents who view illiquidity as a burden and therefore demand
compensation for holding illiquid accounts. |