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Banks, Liquidity Management and Monetary Policy

Author

Listed:
  • Javier Bianchi

    (Federal Reserve Bank of Minneapolis, University of Wisconsin, NBER)

  • Saki Bigio

    (Columbia University)

Abstract

We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock.

Suggested Citation

  • Javier Bianchi & Saki Bigio, 2014. "Banks, Liquidity Management and Monetary Policy," Working Papers 2014-18, Peruvian Economic Association.
  • Handle: RePEc:apc:wpaper:2014-018
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    References listed on IDEAS

    as
    1. Saki Bigio, 2015. "Endogenous Liquidity and the Business Cycle," American Economic Review, American Economic Association, pages 1883-1927.
    2. Armantier, Olivier & Ghysels, Eric & Sarkar, Asani & Shrader, Jeffrey, 2015. "Discount window stigma during the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 118(2), pages 317-335.
    3. Smets, Frank & Collard, Fabrice & Boissay, Frédéric, 2013. "Booms and systemic banking crises," Working Paper Series 1514, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Afridi, Farzana & Dhillon, Amrita & Sharma, Swati, 2015. "Social Networks and Labour Productivity: A Survey of Recent Theory and Evidence," Indian Economic Review, Department of Economics, Delhi School of Economics, pages 25-42.
    2. Guillaume Khayat, 2017. "The Corridor's Width as a Monetary Policy Tool," Working Papers halshs-01611650, HAL.
    3. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    4. Williamson, Stephen D., 2015. "Interest on Reserves, Interbank Lending, and Monetary Policy," Working Papers 2015-24, Federal Reserve Bank of St. Louis.
    5. Nick Butt & Rohan Churm & Michael McMahon & Arpad Morotz & Jochen Schanz, 2015. "QE and the Bank Lending Channel in the United Kingdom," Discussion Papers 1523, Centre for Macroeconomics (CFM).
    6. Choi, Dong Boem & Choi, Hyun-Soo, 2016. "The effect of monetary policy on bank wholesale funding," Staff Reports 759, Federal Reserve Bank of New York, revised 01 Apr 2017.
    7. Butt, Nick & Churm, Rohan & McMahon, Michael & Morotz, Arpad & Schanz, Jochen, 2014. "QE and the bank lending channel in the United Kingdom," Bank of England working papers 511, Bank of England.
    8. Kieran Walsh, 2014. "Portfolio Choice and Partial Default in Emerging Markets: a quantitative analysis," 2014 Meeting Papers 789, Society for Economic Dynamics.
    9. Tao Zha & Jue Ren & Kaiji Chen, 2016. "What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending," 2016 Meeting Papers 82, Society for Economic Dynamics.
    10. repec:cml:moneta:v:iv:y:2016:i:2:p:153-193 is not listed on IDEAS
    11. Kandrac, John & Schlusche, Bernd, 2017. "Quantitative Easing and Bank Risk Taking: Evidence from Lending," Finance and Economics Discussion Series 2017-125, Board of Governors of the Federal Reserve System (U.S.).
    12. Ken Kuttner & James Yetman, 2016. "A comparison of liquidity management tools in seven Asian economies," BIS Papers chapters,in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 33-58 Bank for International Settlements.
    13. Pérez-Forero, Fernando & Vega, Marco, 2014. "The Dynamic Effects of Interest Rates and Reserve Requirements," Working Papers 2014-018, Banco Central de Reserva del Perú.
    14. Keister, Todd & Martin, Antoine & McAndrews, James J., 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    15. Hugo Rodríguez Mendizábal, 2017. "Narrow Banking with Modern Depository Institutions: Is there a Reason to Panic?," Working Papers 955, Barcelona Graduate School of Economics.
    16. Stefan Nagel, 2016. "The Liquidity Premium of Near-Money Assets," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1927-1971.

    More about this item

    Keywords

    Banks; monetary policy; liquidity; capital requirements;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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