Liquidity requirements and the interbank loan market: An experimental investigation

Douglas Davis, Oleg Korenok, John Lightle and Edward S. Prescott

Journal of Monetary Economics, 2020, vol. 115, issue C, 113-126

Abstract: We develop a stylized interbank market environment and use it to evaluate with experimental methods the effects of liquidity requirements. Baseline and liquidity-regulated regimes are analyzed in a simple shock environment, which features a single idiosyncratic shock, and in a compound shock environment, in which the idiosyncratic shock is followed by a randomly occurring second-stage shock. Interbank trading of the illiquid asset follows each shock. In the simple shock environment, we find that liquidity regulations reduce the incidence of bankruptcies, but at a large loss of investment efficiency. In the compound shock environment, liquidity regulations not only impose a loss of investment efficiency but also fail to reduce bankruptcies.

Keywords: Interbank market; Liquidity regulation; Market experiments (search for similar items in EconPapers)
JEL-codes: C9 G21 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:115:y:2020:i:c:p:113-126

DOI: 10.1016/j.jmoneco.2019.05.006

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