Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation

Bucher, M., Hauck, A. ORCID: 0000-0002-6949-6732 and Neyer, U., 2020. Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation. Economic Theory, 70 (1), pp. 165-222. ISSN 0938-2259

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Abstract

We analyze the impact of overnight interbank market frictions on bank loan supply when banks face idiosyncratic liquidity risk and discuss resulting implications for monetary policy implementation. Sufficiently pronounced interbank market frictions imply that banks hold positive or negative precautionary liquidity. Holding positive (negative) precautionary liquidity means that banks hold more (less) liquidity than they expect to need. As holding precautionary liquidity is costly, interbank market frictions negatively influence bank loan supply. However, by means of its standing facilities, the central bank not only offers an alternative to using the interbank market but also determines the costs of friction-induced holdings of positive or negative precautionary liquidity. Therefore, the facilities allow the central bank to influence banks’ expected liquidity costs, and thereby their loan supply, so that interbank market frictions need not be an impediment to monetary policy transmission.

Item Type:	Journal article
Publication Title:	Economic Theory
Creators:	Bucher, M., Hauck, A. and Neyer, U.
Publisher:	Springer
Date:	July 2020
Volume:	70
Number:	1
ISSN:	0938-2259
Identifiers:	Number Type 10.1007/s00199-019-01207-6 DOI 1207 Publisher Item Identifier 1070758 Other
Divisions:	Schools > Nottingham Business School
Record created by:	Linda Sullivan
Date Added:	25 Jun 2019 13:30
Last Modified:	31 May 2021 15:14
URI:	https://irep.ntu.ac.uk/id/eprint/36920

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