Autori
Gale, Douglas
Allen, Franklin
Carletti, Elena

Titolo
Interbank Market Liquidity and Central Bank Intervention
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 2009 - Fascicolo: 9 - Pagina iniziale: 1 - Pagina finale: 34

We develop a simple model of the interbank market where banks trade a long term, safe asset. We show that when there is a lack of opportunities for banks to hedge aggregate and idiosyncratic liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate. The model shows also that market freezes, where banks stop trading with each other, can be a feature of the constrained efficient allocation if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand.




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