Bank liquidity, interbank markets and monetary policy

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Freixas, Xavier; Martin, Antoine; Skeie, David. Bank liquidity, interbank markets and monetary policy. 2010
http://hdl.handle.net/10230/6074
To cite or link this document: http://hdl.handle.net/10230/6074
dc.contributor.author Freixas, Xavier
dc.contributor.author Martin, Antoine
dc.contributor.author Skeie, David
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.issued 2010-02-01
dc.identifier.uri http://hdl.handle.net/10230/6074
dc.description.abstract A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to different implications for optimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 1202
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title Bank liquidity, interbank markets and monetary policy
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2014-06-03T07:14:25Z
dc.subject.keyword Finance and Accounting
dc.subject.keyword bank liquidity
dc.subject.keyword interbank markets
dc.subject.keyword central bank policy
dc.subject.keyword financial fragility
dc.subject.keyword bank runs.
dc.rights.accessRights info:eu-repo/semantics/openAccess


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