Assortative Matching, Interbank Markets, and Monetary Policy

Christian Bittner, Rustam Jamilov and Farzad Saidi

No 19891, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a quantitative macroeconomic framework with heterogeneous financial intermediaries and liquidity management. Banks manage idiosyncratic deposit withdrawal risk through an iterative over-the-counter interbank market with endogenous intensive and extensive margins and equilibrium positive-assortative matching based on balance sheet size. We validate our framework using administrative data from Germany encompassing the universe of bank-to-bank exposures. Our findings strongly support the presence of positive-assortative matching in the data, thereby confirming the model's key mechanism. We show that assortative matching is stable but inefficient relative to the constrained-efficient benchmark, leading to reduced trading volumes and a broader region of inaction in the interbank market, a smaller and riskier banking sector, and lower aggregate demand. Using our empirically validated framework, we study the transmission of monetary policy, secular trends in interbank trading and banking concentration, and the role of deposit market power.

Keywords: Interbank markets; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G20 G21 (search for similar items in EconPapers)
Date: 2025-01
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