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The Macroeconomic Impact of Money Market Freezes

Author

Listed:
  • Marie Hoerova

    (European Central Bank)

  • Harald Uhlig

    (University of Chicago)

  • Fiorella De Fiore

    (European Central Bank)

Abstract

We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact.

Suggested Citation

  • Marie Hoerova & Harald Uhlig & Fiorella De Fiore, 2017. "The Macroeconomic Impact of Money Market Freezes," 2017 Meeting Papers 1092, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1092
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_1092.pdf
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    References listed on IDEAS

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    1. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
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    3. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
    4. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
    5. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    6. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-824, November.
    7. Xavier Freixas & José Jorge, 2008. "The Role of Interbank Markets in Monetary Policy: A Model with Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1151-1176, September.
    8. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2015. "Liquidity hoarding and interbank market rates: The role of counterparty risk," Journal of Financial Economics, Elsevier, vol. 118(2), pages 336-354.
    9. Rafael Repullo, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    10. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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    Cited by:

    1. Ranaldo, Angelo & Wrampelmeyer, Jan, 2016. "Unsecured and Secured Funding," Working Papers on Finance 1616, University of St. Gallen, School of Finance.

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