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Bank demand for central bank liquidity and its impact on interbank markets

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  • Di Xiao

    (Beijing Jiaotong University)

  • Andreas Krause

    (University of Bath)

Abstract

We develop a model of monetary policy implementation in which banks bid for liquidity provided by the central bank in fixed rate auctions, considering liquidity injections and extractions as well as the impact of a subsequent interbank market. We derive the equilibrium demands of banks. We also investigate the impact the central bank auction has on the subsequent interbank market and find that while lending in the interbank market is reduced, the interest rates are moving in the desired direction. In the context of the interbank network, the impact of monetary policy on banks depends on their network locations, which may give rise to the prospects of distributional effects of monetary policy.

Suggested Citation

  • Di Xiao & Andreas Krause, 2022. "Bank demand for central bank liquidity and its impact on interbank markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(3), pages 639-679, July.
    • Handle: RePEc:spr:jeicoo:v:17:y:2022:i:3:d:10.1007_s11403-021-00336-3
    DOI: 10.1007/s11403-021-00336-3
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    More about this item

    Keywords

    Central bank operation; Bid shading; Multi-unit auction; Fixed rate auction; Variable rate auction; Interbank network; Core–periphery network;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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