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Banks, Liquidity Management, and Monetary Policy

Javier Bianchi () and Saki Bigio

No 503, Staff Report from Federal Reserve Bank of Minneapolis

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: Capital requirements; Monetary policy; Liquidity (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 G1 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2014-09-08
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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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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