Banks, Liquidity Management and Monetary Policy
We develop a new tractable model of banks' liquidity management and the credit channel of monetary policy. Banks finance loans by issuing demand deposits. Because loans are illiquid, deposit transfers across banks must be settled with reserves. Deposit withdrawals are random, and banks manage liquidity risk by holding a precautionary buffer of reserves. We show how different shocks affect the banking system by altering the trade-off between profiting from lending and incurring greater liquidity risk. Through various tools, monetary policy affects the real economy by altering that trade-off. In a quantitative application, we study the driving forces behind the decline in lending and liquidity hoarding by banks during the 2008 financial crisis. Our analysis underscores the importance of disruptions in interbank markets followed by a persistent decline in credit demand.
|Date of creation:||Sep 2014|
|Note:||EFG IFM ME|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- 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.
- Armantier, Olivier & Ghysels, Eric & Sarkar, Asani & Shrader, Jeffrey, 2011. "Discount window stigma during the 2007-2008 financial crisis," Staff Reports 483, Federal Reserve Bank of New York, revised 01 Aug 2015.
- Saki Bigio, 2015. "Endogenous Liquidity and the Business Cycle," American Economic Review, American Economic Association, vol. 105(6), pages 1883-1927, June.
- New York University & Saki Bigio, 2010. "Endogenous Liquidity and the Business Cycle," 2010 Meeting Papers 672, Society for Economic Dynamics.
- Saki Bigio, 2014. "Endogenous Liquidity and the Business Cycle," Working Papers 2014-24, Peruvian Economic Association.
- 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)