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Interbank Networks in the Shadows of the Federal Reserve Act

Haelim Anderson, Guillermo Ordonez and Selman Erol
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Haelim Anderson: Federal Deposit Insurance Corporation
Guillermo Ordonez: University of Pennsylvania
Selman Erol: Carnegie Mellon University, Tepper School of Business

No 1285, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Central banks provide public liquidity (through lending facilities and promises of bailouts) with the intent to stabilize financial markets. Even though this provision is restricted to member (regulated) banks, an interbank system can in principle develop so to give indirect access to nonmember (shadow) banks. We construct a model to understand how the network may change in the presence of Central Bank interventions and how those changes can translate into more room for contagion and an endogenously higher financial fragility. We provide evidence that upon the introduction of the Fed’s lending facilities in 1914, aggregate liquidity declined and systemic risks increased.

New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Date: 2019
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