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Interbank Market and Macroprudential Tools in a DSGE Model

  • Carrera, Cesar

    (Banco Central de Reserva del Perú)

  • Vega, Hugo

    (Banco Central de Reserva del Perú
    London School of Economics)

The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in needs of liquidity. Regulating the interbank market may actually benefit the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identification of the final effects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the effects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We find that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired effect on private expectations) or a zero bound (i.e. liquidity trap scenarios).

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2012-014.

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Date of creation: Jun 2012
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Handle: RePEc:rbp:wpaper:2012-014
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  1. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and banking in a DSGE model of the euro area," Temi di discussione (Economic working papers) 740, Bank of Italy, Economic Research and International Relations Area.
  2. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers 0910-01, Columbia University, Department of Economics.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  5. Rodrigo Alfaro A. & Rodrigo Cifuentes S., 2009. "Financial Stability, Monetary Policy and Central Banking: An Overview," Working Papers Central Bank of Chile 554, Central Bank of Chile.
  6. Carrera, César, 2012. "Políticas de Encajes y Modelos Económicos," Working Papers 2012-006, Banco Central de Reserva del Perú.
  7. Ethan Cohen-Cole & Enrique Martinez-Garcia, 2008. "The balance sheet channel," Risk and Policy Analysis Unit Working Paper QAU08-7, Federal Reserve Bank of Boston.
  8. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, June.
  9. Valeriya Dinger & Jürgen Von Hagen, 2009. "Does Interbank Borrowing Reduce Bank Risk?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 491-506, 03.
  10. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
  11. International Monetary Fund, 2012. "Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America," IMF Working Papers 12/142, International Monetary Fund.
  12. Jan Vlcek & Scott Roger, 2012. "Macrofinancial Modeling At Central Banks; Recent Developments and Future Directions," IMF Working Papers 12/21, International Monetary Fund.
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