Strategic Allocation of Liquidity in the InterBank Money Market
AbstractABSTRACT This paper focuses on an ex post trading problem in inter-bank money markets. An “over the counter” inter-bank market is modeled in this paper. Relationship banking leads to private proprietary information that causes bargaining failure in such markets with positive probability. Both independent and interdependent bargaining games are studied. It is shown that the allocation is not constrained efficient under bargaining games without monetary intervention. Monetary intervention is characterized as state contingent market making by the Central Bank. Such intervention is shown to dominate under a variety of informational and bargaining assumptions. The literature on monetary policy design is thus extended in the present paper by providing a micro-rationale for Central Bank intervention and by characterizing the solution of state contingent market making in liquidity.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 15427.
Date of creation: 2004
Date of revision:
KEY WORDS Liquidity; Incomplete Information; Bargaining Failure; Central Bank; Monetary Intervention; Market Making;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- G0 - Financial Economics - - General
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