The role of interbank markets in monetary policy: A model with rationing

Xavier Freixas () and José Jorge

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper analyses the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections induce an equilibrium with rationing in the credit market. This has two major implications: first, it reconciles the irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy (magnitude effect) and, second, it shows that banks’ liquidity positions condition their reaction to monetary policy (Kashyap and Stein liquidity effect).

Keywords: Banking; Rationing; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E44 G21 (search for similar items in EconPapers)
Date: 2007-03, Revised 2008-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (157)

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Journal Article: The Role of Interbank Markets in Monetary Policy: A Model with Rationing (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1027

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