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Simulating interbank money market interest rate using search models within a Nash-Equilibrium framework

Author

Listed:
  • Raie, Reza

    (Faculty of Management, University of Tehran)

  • Komijani, Akbar

    (Faculty of Economics, University of Tehran)

  • Baky Haskuee, Mortaza

    (Faculty of Economics, Imam Sadeq University)

  • Jafari, Hamidreza

    (Ph.d candidate of Finance, Faculty of Management, University of Tehran)

Abstract

The interbank market is a part of the money market in which banks and credit institutions enter into transactions to finance and consume surplus resources in the short term with the aim of balancing their liquidity situation. In a corridor framework of monetary policy, the central bank sets interbank money market (IBMM) interest rate and also implements open market operation (OMO) to direct market interest rate towards the policy rate. Hence estimation of IBMM equilibrium interest rate is the most important challenge in monetary policy making. In order to model the interbank market in Iran, this research provides a 4-periods search model, including shocks, searching for counterparty, bargaining and settlement with central bank, and it simulates Iranian banks’ behavior to derive Iran’s interbank rate from 2017 to 2019. The results show that the model-driven lending rate of large banks is higher than their borrowing rate which is consistent with rational behavior of the banks, while the actual rates are the same in both cases that implies distortion in interest rate policy making by Iran central bank.

Suggested Citation

  • Raie, Reza & Komijani, Akbar & Baky Haskuee, Mortaza & Jafari, Hamidreza, 2020. "Simulating interbank money market interest rate using search models within a Nash-Equilibrium framework," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 7(3), pages 25-50, October.
    • Handle: RePEc:ris:qjatoe:0197
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    More about this item

    Keywords

    Interbank Money Market; Nash Equilibrium; Search Models; Network Models; Interest rate Corridor;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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