Banks, Liquidity Management and Monetary Policy

Javier Bianchi and Saki Bigio

No 20490, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a tractable model of banks' liquidity management and the credit channel of monetary policy. Banks finance loans by issuing demand deposits. Loans are illiquid, and transfers of deposits across banks must be settled with reserves in a frictional over the counter market. To mitigate the risk of large withdrawals of deposits, banks hold a precautionary buffer of reserves and government bonds. We show how monetary policy affects the banking system by altering the tradeoff between profiting from lending and incurring greater liquidity risk. We consider two applications of the theory, one involving the connection between the implementation of monetary policy and pass-through to loan rates, and another considering a quantitative decomposition behind the collapse in bank lending during the 2008 financial crisis. Our analysis underscores the importance of liquidity frictions and the functioning of interbank markets for the conduct of monetary policy.

JEL-codes: E0 E4 E51 E52 G01 G1 G11 G18 G20 G21 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac and nep-mon
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (67)

Published as Javier Bianchi & Saki Bigio, 2022. "Banks, Liquidity Management, and Monetary Policy," Econometrica, Econometric Society, vol. 90(1), pages 391-454, January.

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Journal Article: Banks, Liquidity Management, and Monetary Policy (2022)
Working Paper: Banks, Liquidity Management and Monetary Policy (2014)
Working Paper: Banks, Liquidity Management, and Monetary Policy (2014)
Working Paper: Banks, Liquidity Management and Monetary Policy (2014)
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