Why do we have an interbank money market?
AbstractThe interbank money market plays a key role in the execution of monetary policy. Hence, it is important to know the functioning of this market and the determinants of the interbank money market rate. In this paper, we develop an interbank money market model with a heterogeneous banking sector. We show that besides for balancing daily liquidity fluctuations banks participate in the interbank market because they have different marginal costs of obtaining funds from the central bank. In the euro area, which we refer to, these cost differences occur because banks have different marginal cost of collateral which they need to hold to obtain funds from the central bank. Banks with relatively low marginal costs act as intermediaries between the central bank and banks with relatively high marginal costs. The necessary positive spread between the interbank market rate and the central bank rate is determined by transaction costs and credit risk in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks.
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.
Bibliographic InfoPaper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 182.
Date of creation: Nov 2003
Date of revision:
interbank money market; European Central Bank; monetary policy instruments;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-MAC-2005-10-04 (Macroeconomics)
- NEP-MON-2005-10-04 (Monetary Economics)
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.:
- Ayuso, J. & Repullo, R., 2001.
"Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Cental Bank,"
0104, Centro de Estudios Monetarios Y Financieros-.
- Ayuso, Juan & Repullo, Rafael, 2001. "Why did the banks overbid? An empirical model of the fixed rate tenders of the European Central Bank," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 857-870, November.
- Juan Ayuso & Rafael Repullo, 2001. "Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Central Bank," Banco de Espaï¿½a Working Papers 0105, Banco de Espa�a.
- De La Motte, Laura & Czernomoriez, Janna & Clemens, Marius, 2010.
"Zur Vertrauensökonomik: Der Interbankenmarkt in der Krise von 2007-2009
[Economics of trust: The interbank market during the crisis 2007-2009]," MPRA Paper 20357, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hubert Gabrisch).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.