Excess liquidity, bank pricing rules, and monetary policy

Pierre-Richard Agénor and Karim El Aynaoui

Journal of Banking & Finance, 2010, vol. 34, issue 5, 923-933

Abstract: This paper studies the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections. The demand for excess reserves is determined by precautionary factors and the opportunity cost of holding cash. It is argued that excess liquidity may impart greater stickiness to the deposit rate in response to a monetary contraction and induce an easing of collateral requirements on borrowers - which in turn may translate into a lower risk premium and lower lending rates. As a result, asymmetric bank pricing behavior under excess liquidity may hamper the ability of a contractionary monetary policy to lower inflation.

Keywords: Excess; liquidity; Bank; interest; rates; Monetary; policy (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (43)

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Working Paper: Excess Liquidity, Bank Pricing Rules, and Monetary Policy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:5:p:923-933

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