Distinguishing between signs of illiquidity and insolvency: BoJ paper


A Bank of Japan paper published on Wednesday says creditors' behaviour in lending markets can be used as a signal for central banks to distinguish between illiquid and insolvent borrowers.

Author Junnosuke Shino constructs an abstract model in which policy-makers lend liquidity and base their preference on the state of the borrowers as well as the soundness of its own balance sheet. Shino assumes the policy-maker cannot distinguish solvent from insolvent borrowers ex-ante and that their decision

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