Precautionary Reserves and the Interbank Market

Adam Ashcraft, James McAndrews and David Skeie

Journal of Money, Credit and Banking, 2011, vol. 43, issue s2, 311-348

Abstract: Extreme disruptions in the interbank market severely hampered the broader financial system during the 2007–08 financial crisis. We use Fedwire data to estimate fed funds trades and track banks’ intraday balances. We show empirical evidence of banks’ precautionary holding of reserves and reluctance to lend linked to documented extreme fed funds rate volatility, including the fed funds rate spiking above the discount rate and crashing to zero. We develop a model of constrained banks that makes new predictions and provides a unified explanation for the stark anomalies during the crisis, our empirical findings, and previous stylized facts from normal times.

Date: 2011
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https://doi.org/10.1111/j.1538-4616.2011.00438.x

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Journal Article: Precautionary Reserves and the Interbank Market (2011)
Working Paper: Precautionary reserves and the interbank market (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:43:y:2011:i:s2:p:311-348

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