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Imperfect interbank markets and the lender of last resort

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  • Matsuoka, Tarishi

Abstract

This paper presents a monetary model in which interbank markets have limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 11 ()
Pages: 1673-1687

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1673-1687

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Overlapping generations; Money; Interbank markets; Limited commitment; The lender of last resort;

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