TY - JOUR
T1 - Interbank market liquidity and central bank intervention
AU - Allen, Franklin
AU - Carletti, Elena
AU - Gale, Douglas
PY - 2009/7
Y1 - 2009/7
N2 - We develop a simple model of the interbank market where banks trade a long term, safe asset. When there is a lack of opportunities for banks to hedge idiosyncratic and aggregate liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate. It can be constrained efficient for banks to hoard liquidity and stop trading with each other if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand.
AB - We develop a simple model of the interbank market where banks trade a long term, safe asset. When there is a lack of opportunities for banks to hedge idiosyncratic and aggregate liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate. It can be constrained efficient for banks to hoard liquidity and stop trading with each other if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand.
KW - Constrained efficiency
KW - Open market operations
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U2 - 10.1016/j.jmoneco.2009.04.003
DO - 10.1016/j.jmoneco.2009.04.003
M3 - Article
AN - SCOPUS:68049107358
SN - 0304-3932
VL - 56
SP - 639
EP - 652
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 5
ER -