Interbank funding as insurance mechanism for (persistent) liquidity shocks
Marcel Bluhm
No 117, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE
Abstract:
The interbank market is important for the efficient functioning of the financial system, transmission of monetary policy and therefore ultimately the real economy. In particular, it facilitates banks' liquidity management. This paper aims at extending the literature which views interbank markets as mutual liquidity insurance mechanism by taking into account persistence of liquidity shocks. Following a theory of long-term interbank funding a financial system which is modeled as a micro-founded agent based complex network interacting with a real economic sector is developed. The model features interbank funding as an over-the-counter phenomenon and realistically replicates financial system phenomena of network formation, monetary policy transmission and endogenous money creation. The framework is used to carry out an optimal policy analysis in which the policymaker maximizes real activity via choosing the optimal interest rate in a trade-off between loan supply and financial fragility. It is shown that the interbank market renders the financial system more efficient relative to a setting without mutual insurance against persistent liquidity shocks and therefore plays a crucial role for welfare.
Keywords: financial fragility; interbank market; liquidity; maturity; network model (search for similar items in EconPapers)
JEL-codes: E44 E51 G01 G21 G28 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-ias, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://www.econstor.eu/bitstream/10419/128633/1/848733894.pdf (application/pdf)
Related works:
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:zbw:safewp:117
DOI: 10.2139/ssrn.2690137
Access Statistics for this paper
More papers in SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().