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Liquidity, Information, and the Overnight Rate Author info | Abstract | Publisher info | Download info | Related research | Statistics Christian Ewerhart
Nuno Cassola
Steen Ejerskov
Natacha Valla
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We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generate an overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.
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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number
iewwp186.
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Keywords: Liquidity effect ; asymmetric information ; monetary policy implementation ; Other versions of this item:
Find related papers by JEL classification: G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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