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Imperfect Interbank Markets and the Lender of Last Resort

  • Tarishi Matsuoka

    ()

    (Graduate School of Economics, Kyoto University)

This paper presents a monetary model in which interbank markets bear limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP731.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 731.

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Length: 34pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:kyo:wpaper:731
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