Illiquidity and all its friends

Jean Tirole*

*Corresponding author for this work

    Research output: Contribution to journalReview articlepeer-review

    77 Scopus citations


    The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistic, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity, and analyzes how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyzes optimal combinations thereof; it stresses the need for macro-prudential policies.

    Original languageEnglish (US)
    Pages (from-to)287-325
    Number of pages39
    JournalJournal of Economic Literature
    Issue number2
    StatePublished - Jun 2011

    ASJC Scopus subject areas

    • Economics and Econometrics


    Dive into the research topics of 'Illiquidity and all its friends'. Together they form a unique fingerprint.

    Cite this