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Interbank market turmoils and the macroeconomy

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  • Paweł Kopiec

    (Narodowy Bank Polski)

Abstract

This paper studies the macroeconomic consequences of interbank market disruptions caused by higher counterparty risk. I propose a novel, dynamic model of banking sector where banks trade liquidity in the frictional OTC market à la Afonso and Lagos (2015) that features counterparty risk. The model is then embedded into an otherwise standard New Keynesian framework to analyze the macroeconomic impact of interbank market turmoils: economy suffers from a prolonged slump and deflationary pressure during such episodes. I use the model to analyze the effectiveness of two policy measures: rise in the supply of central bank reserves and interbank market guarantees in mitigating the adverse effects of those disruptions.

Suggested Citation

  • Paweł Kopiec, 2018. "Interbank market turmoils and the macroeconomy," NBP Working Papers 280, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:280
    as

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    File URL: http://www.nbp.pl/publikacje/materialy_i_studia/280_en.pdf
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    References listed on IDEAS

    as
    1. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
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    More about this item

    Keywords

    Financial crisis; Interbank market; Policy intervention; OTC market;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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