Imperfect Interbank Markets and the Lender of Last Resort

Tarishi Matsuoka

No 731, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper presents a monetary model in which interbank markets bear limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.

Keywords: Overlapping generations; money; interbank markets; limited commitment; the lender of last resort (search for similar items in EconPapers)
JEL-codes: E42 E51 G21 (search for similar items in EconPapers)
Pages: 34pages
Date: 2010-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Imperfect interbank markets and the lender of last resort (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:731

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