Abstract

This paper, specifying the effects that liquidity management has on the profit function of a generic bank facing an adverse selection problem a là Stiglitz and Weiss (1981), gives a microeconomic foundation, of a partial equilibrium nature, of credit rationing as a transmission mechanism of monetary policy (Blinder 1987). We derive some comparative statics effects very similar to those obtained from Bernanke and Blinder (1992) econometric model. Our model transforms the Pareto-optimal equilibrium with credit rationing into a Pareto-dominated one, exemplifying how the size of agency costs stemming from informational asymmetries may depend on liquidity, a circumstance that is currently being underrated by the contemporary banking theory.