Unconventional monetary policy and funding liquidity risk

Adrien d'Avernas, Quentin Vandeweyer and Matthieu Darracq Paries

No 2350, Working Paper Series from European Central Bank

Abstract: This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities. JEL Classification: E43, E44, E52, G12

Keywords: asset pricing; money markets; quantitative easing; shadow banks (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
Note: 3107481
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202350

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