EconPapers    
Economics at your fingertips  
 

Interbank Market Liquidity and Central Bank Intervention

Franklin Allen, Elena Carletti () and Douglas Gale ()

No ECO2009/09, Economics Working Papers from European University Institute

Abstract: 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.

Keywords: interbank market; liquidity; central bank intervention; open market operations (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (265)

Downloads: (external link)
http://cadmus.eui.eu/dspace/bitstream/1814/10677/1/ECO_2009_09.pdf main text
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://cadmus.eui.eu/dspace/bitstream/1814/10677/1/ECO_2009_09.pdf [301 Moved Permanently]--> https://cadmus.eui.eu/dspace/bitstream/1814/10677/1/ECO_2009_09.pdf)

Related works:
Journal Article: Interbank market liquidity and central bank intervention (2009) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2009/09

Access Statistics for this paper

More papers in Economics Working Papers from European University Institute Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Cécile Brière ().

 
Page updated 2025-03-30
Handle: RePEc:eui:euiwps:eco2009/09