Interbank market liquidity and central bank intervention
AbstractWe develop a simple model of the interbank market where banks trade a long term, safe asset. When there is a lack of opportunities for banks to hedge idiosyncratic and aggregate liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate. It can be constrained efficient for banks to hoard liquidity and stop trading with each other if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 56 (2009)
Issue (Month): 5 (July)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566
Open market operations Constrained efficiency;
Other versions of this item:
- Franklin Allen & Elena Carletti & Douglas Gale, 2009. "Interbank Market Liquidity and Central Bank Intervention," Economics Working Papers ECO2009/09, European University Institute.
- G01 - Financial Economics - - General - - - Financial Crises
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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