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Banks, Liquidity Management and Monetary Policy

Author

Listed:
  • Saki Bigio

    (Columbia GSB)

  • Javier Bianchi

    (University of Wisconsin)

Abstract

We develop a new framework for studying the implementation of monetary policy through the banking sector. Banks are subject to a maturity mismatch problem leading to precautionary holdings of reserves. Through various instruments, monetary policy alters tradeos banks face between lending, holding reserves, holding deposits and paying dividends. This translates into the real economy via eects on real interests and lending. We study how these instruments interact with shocks to the volatility in the payments system, bank losses, the demand for loans and with capital requirements. We use a calibrated version of the model to answer, quantitatively, why have banks held onto a substantial increase in reserves while not increasing lending since 2008.

Suggested Citation

  • Saki Bigio & Javier Bianchi, 2014. "Banks, Liquidity Management and Monetary Policy," 2014 Meeting Papers 489, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:489
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    References listed on IDEAS

    as
    1. Saki Bigio, 2015. "Endogenous Liquidity and the Business Cycle," American Economic Review, American Economic Association, pages 1883-1927.
    2. 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.
    3. Smets, Frank & Collard, Fabrice & Boissay, Frédéric, 2013. "Booms and systemic banking crises," Working Paper Series 1514, European Central Bank.
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    Citations

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    Cited by:

    1. Hugo Rodríguez Mendizábal, 2017. "Narrow Banking with Modern Depository Institutions: Is there a Reason to Panic?," Working Papers 955, Barcelona Graduate School of Economics.
    2. Williamson, Stephen D., 2015. "Interest on Reserves, Interbank Lending, and Monetary Policy," Working Papers 2015-24, Federal Reserve Bank of St. Louis.
    3. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    4. Kieran Walsh, 2014. "Portfolio Choice and Partial Default in Emerging Markets: a quantitative analysis," 2014 Meeting Papers 789, Society for Economic Dynamics.
    5. Chen, Kaiji & Ren, Jue & Zha, Tao, 2016. "What we learn from China's rising shadow banking: exploring the nexus of monetary tightening and banks' role in entrusted lending," FRB Atlanta Working Paper 2016-1, Federal Reserve Bank of Atlanta.
    6. Butt, Nick & Churm, Rohan & McMahon, Michael & Morotz, Arpad & Schanz, Jochen, 2014. "QE and the bank lending channel in the United Kingdom," Bank of England working papers 511, Bank of England.
    7. Kandrac, John & Schlusche, Bernd, 2017. "Quantitative Easing and Bank Risk Taking: Evidence from Lending," Finance and Economics Discussion Series 2017-125, Board of Governors of the Federal Reserve System (U.S.).
    8. Keister, Todd & Martin, Antoine & McAndrews, James J., 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    9. Guillaume Khayat, 2017. "The Corridor's Width as a Monetary Policy Tool," Working Papers halshs-01611650, HAL.
    10. Choi, Dong Boem & Choi, Hyun-Soo, 2016. "The effect of monetary policy on bank wholesale funding," Staff Reports 759, Federal Reserve Bank of New York, revised 01 Apr 2017.
    11. Ken Kuttner & James Yetman, 2016. "A comparison of liquidity management tools in seven Asian economies," BIS Papers chapters,in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 33-58 Bank for International Settlements.
    12. Stefan Nagel, 2016. "The Liquidity Premium of Near-Money Assets," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1927-1971.
    13. Pérez-Forero, Fernando & Vega, Marco, 2014. "The Dynamic Effects of Interest Rates and Reserve Requirements," Working Papers 2014-018, Banco Central de Reserva del Perú.
    14. repec:cml:moneta:v:iv:y:2016:i:2:p:153-193 is not listed on IDEAS

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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