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Strategic Allocation of Liquidity in the InterBank Money Market

  • Mallick, Indrajit

ABSTRACT This paper focuses on an ex post trading problem in inter-bank money markets. An “over the counter” inter-bank market is modeled in this paper. Relationship banking leads to private proprietary information that causes bargaining failure in such markets with positive probability. Both independent and interdependent bargaining games are studied. It is shown that the allocation is not constrained efficient under bargaining games without monetary intervention. Monetary intervention is characterized as state contingent market making by the Central Bank. Such intervention is shown to dominate under a variety of informational and bargaining assumptions. The literature on monetary policy design is thus extended in the present paper by providing a micro-rationale for Central Bank intervention and by characterizing the solution of state contingent market making in liquidity.

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File URL: http://mpra.ub.uni-muenchen.de/15427/1/MPRA_paper_15427.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15427.

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Date of creation: 2004
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Handle: RePEc:pra:mprapa:15427
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  1. Bhattacharya, S. & Padilla, A.J., 1994. "Dynamic Banking: A Reconsideration," Papers 9413, Centro de Estudios Monetarios Y Financieros-.
  2. Xavier Freixas & Bruno Parigi, 1998. "Contagion and efficiency in gross and net interbank payment systems," Proceedings 592, Federal Reserve Bank of Chicago.
  3. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
  4. Mallick, Indrajit, 2004. "Inefficiency of bilateral bargaining in interbank markets," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 43-55.
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