Interbank Lending and the Demand for Central Bank Loans - a Simple Microfoundation

Markus Pasche

No 2010-070, Jena Economics Research Papers from Friedrich-Schiller-University Jena

Abstract: The paper presents a simple model of banking behavior where portfolio, liquidity, and liability management determine simultaneously the demand and supply of borrowed reserves on the interbank market. As the central bank is one player in this market due to its refinancing policy, it is able to determine the interest rate and henceforth the residual demand for central bank loans. Comparative static analysis shows how external or monetary policy shocks affect the behavior on the interbank market, the volume as well as the structure of the bank's balance sheet. It turns out that the banking firm behavior is non-linear and partially non-monotonous, indicating that the transmission of monetary measures is more complex when endogeneous banking behavior is taken into account.

Keywords: banking firm; balance sheet; interbank market; borrowed reserves; central banking; liquidity; transmission (search for similar items in EconPapers)
JEL-codes: E43 E58 G21 (search for similar items in EconPapers)
Date: 2010-10-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:jrp:jrpwrp:2010-070

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