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Bank demand for central bank liquidity and its impact on interbank markets

Di Xiao () and Andreas Krause ()
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Di Xiao: Beijing Jiaotong University
Andreas Krause: University of Bath

Journal of Economic Interaction and Coordination, 2022, vol. 17, issue 3, No 1, 639-679

Abstract: Abstract We develop a model of monetary policy implementation in which banks bid for liquidity provided by the central bank in fixed rate auctions, considering liquidity injections and extractions as well as the impact of a subsequent interbank market. We derive the equilibrium demands of banks. We also investigate the impact the central bank auction has on the subsequent interbank market and find that while lending in the interbank market is reduced, the interest rates are moving in the desired direction. In the context of the interbank network, the impact of monetary policy on banks depends on their network locations, which may give rise to the prospects of distributional effects of monetary policy.

Keywords: Central bank operation; Bid shading; Multi-unit auction; Fixed rate auction; Variable rate auction; Interbank network; Core–periphery network (search for similar items in EconPapers)
JEL-codes: D85 E52 E58 G21 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11403-021-00336-3

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