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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marvin Goodfriend & Robert G. King, 1988.
"Financial deregulation, monetary policy, and central banking,"
88-01, Federal Reserve Bank of Richmond.
- Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 3-22.
- Goodfriend, M. & King, R.G., 1988. "Financial Deregulation, Monetary Policy, And Central Banking," RCER Working Papers 121, University of Rochester - Center for Economic Research (RCER).
- Rafael Repullo, 2005.
"Liquidity, Risk Taking, and the Lender of Last Resort,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 1(2), September.
- Repullo, Rafael, 2005. "Liquidity, Risk-Taking and the Lender of Last Resort," CEPR Discussion Papers 4967, C.E.P.R. Discussion Papers.
- Rafael Repullo, 2005. "Liquidity, Risk-Taking, And The Lender Of Last Resort," Working Papers wp2005_0504, CEMFI.
- Repullo, Rafael, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," MPRA Paper 826, University Library of Munich, Germany.
- Acharya, Viral V & Gromb, Denis & Yorulmazer, Tanju, 2008.
"Imperfect Competition in the Inter-Bank Market for Liquidity as a Rationale for Central Banking,"
CEPR Discussion Papers
6984, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Denis Gromb & Tanju Yorulmazer, 2012. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 184-217, April.
- Franklin Allen & Douglas Gale, 2003.
"Financial Intermediaries and Markets,"
Center for Financial Institutions Working Papers
00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Gary Gorton & Lixin Huang, 2002.
"Liquidity, Efficiency and Bank Bailouts,"
NBER Working Papers
9158, National Bureau of Economic Research, Inc.
- Flannery, Mark J, 1996.
"Financial Crises, Payment System Problems, and Discount Window Lending,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(4), pages 804-24, November.
- Mark J. Flannery, 1996. "Financial crises, payment system problems, and discount window lending," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 804-831.
- Xavier Freixas & José Jorge, 2007.
"The role of interbank markets in monetary policy: A model with rationing,"
Economics Working Papers
1027, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
- Xavier Freixas & José Jorge, 2008. "The Role of Interbank Markets in Monetary Policy: A Model with Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1151-1176, 09.
- Douglas W. Diamond & Raghuram G. Rajan, 2002.
"Liquidity Shortages and Banking Crises,"
NBER Working Papers
8937, National Bureau of Economic Research, Inc.
- Bengt Holmstrom & Jean Tirole, 1996.
"Private and Public Supply of Liquidity,"
NBER Working Papers
5817, National Bureau of Economic Research, Inc.
- Allen, Franklin & Carletti, Elena, 2006.
"Mark-to-market accounting and liquidity pricing,"
CFS Working Paper Series
2006/17, Center for Financial Studies (CFS).
- Allen, Franklin & Carletti, Elena, 2005.
"Credit risk transfer and contagion,"
CFS Working Paper Series
2005/25, Center for Financial Studies (CFS).
- Viral Acharya & Tanju Yorulmazer, 2007.
"Cash-in-the-market pricing and optimal resolution of bank failures,"
Bank of England working papers
328, Bank of England.
- Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
- Marvin Goodfriend, 2002. "Interest on reserves and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 77-84.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If references are entirely missing, you can add them using this form.