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Banks, Liquidity Management and Monetary Policy

Javier Bianchi and Saki Bigio

No 18, Working Papers from Peruvian Economic Association

Abstract: We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock.

Keywords: Banks; monetary policy; liquidity; capital requirements (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G1 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (80)

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Journal Article: Banks, Liquidity Management, and Monetary Policy (2022) Downloads
Working Paper: Banks, Liquidity Management, and Monetary Policy (2014) Downloads
Working Paper: Banks, Liquidity Management and Monetary Policy (2014) Downloads
Working Paper: Banks, Liquidity Management and Monetary Policy (2014)
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