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Bank liquidity, interbank markets, and monetary policy
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Freixas, Xavier, Martin, Antoine and Skeie, David (2011) Bank liquidity, interbank markets, and monetary policy. Review of Financial Studies, 24 (8). pp. 2656-2692. doi:10.1093/rfs/hhr018 ISSN 0893-9454.
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Official URL: http://dx.doi.org/10.1093/rfs/hhr018
Abstract
A lesson of the recent financial crisis is that the interbank market is crucial for banks facing uncertainty regarding their liquidity needs. This article studies the efficiency of the interbank market in allocating funds. We show that the central bank should lower the interbank rate when confronted with a crisis that causes a disparity in the liquidity held among banks. This suggests that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. We also show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.
Item Type: | Journal Article | ||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Review of Financial Studies | ||||||
Publisher: | Oxford University Press | ||||||
ISSN: | 0893-9454 | ||||||
Official Date: | August 2011 | ||||||
Dates: |
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Volume: | 24 | ||||||
Number: | 8 | ||||||
Page Range: | pp. 2656-2692 | ||||||
DOI: | 10.1093/rfs/hhr018 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Restricted or Subscription Access |
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