Bank Demand for Central Bank Liquidity and its Impact on Interbank Markets

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Abstract

We develop a model of monetary policy implementation in which banks bid for liquidity provided by the central bank in fixed rate auctions, considering liquidity injections and extractions as well as the impact of a subsequent interbank market. We derive the equilibrium demands of banks. We also investigate the impact the central bank auction has on the subsequent interbank market and find that while lending in the interbank market is reduced, the interest rates are moving in the desired direction. In the context of the interbank network the impact of monetary policy on banks depends on their network locations, which may give rise to the prospects of distributional effects of monetary policy.
Original languageEnglish
Number of pages48
JournalJournal of Economic Interaction and Coordination
Early online date10 Oct 2021
DOIs
Publication statusPublished - 31 Dec 2021

Keywords

  • Bid shading
  • Central bank operation
  • Core–periphery network
  • Fixed rate auction
  • Interbank network
  • Multi-unit auction
  • Variable rate auction

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics

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