IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/34056.html

A Trade-off Between Monetary Policy Transmission and Systemic Risk

Author

Listed:
  • Kaiji Chen
  • Yiqing Xiao
  • Tao Zha

Abstract

We study how interbank funding links monetary policy transmission to systemic risk in a banking system with heterogeneous access to deposit funding. Using bank-level data from China, we show that monetary policy easing reallocates liquidity through the interbank market: large banks raise household demand deposits and lend in the interbank market, while small banks expand loans through interbank borrowing. During economic downturns, greater reliance on interbank funding is associated with higher systemic risk. To interpret these facts, we build a structural model with deposit-rich and deposit-poor banks and interbank rollover risk. The model shows that monetary policy easing reallocates liquidity and boosts lending, but also raises run risk. It reveals a macroprudential trade-off: a regulatory limit on interbank funding weakens monetary policy transmission but reduces systemic risk.

Suggested Citation

  • Kaiji Chen & Yiqing Xiao & Tao Zha, 2025. "A Trade-off Between Monetary Policy Transmission and Systemic Risk," NBER Working Papers 34056, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34056
    Note: AP DEV EFG ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w34056.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ma, Yong & Lan, Huanqi, 2026. "How investment irreversibility shapes firm responses to monetary policy: Evidence from a major earthquake," Journal of International Money and Finance, Elsevier, vol. 166(C).
    2. Burdekin, Richard C.K. & Siklos, Pierre L., 2026. "Combating crises and deflation: China's monetary policy from financial liberalization through the pandemic," Economic Modelling, Elsevier, vol. 161(C).
    3. Jiaxing Weng & Haijun Yang & Tongyu Wang, 2025. "Emergence of Homophily under Contextual Mechanisms," Papers 2510.09821, arXiv.org.
    4. Xu, Yuan & Qi, Yudong & Tan, Haoyan, 2026. "Real estate expansion and the effectiveness of monetary policy: Evidence from China," Finance Research Letters, Elsevier, vol. 88(C).

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:34056. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.