The Role of Interbank Markets in Monetary Policy: A Model with Rationing
We thank an anonymous referee for very helpful comments and suggestions. We are also grateful to Viral Acharya, Adam Ashcraft, Arturo Estrella, Falko Fecht, Stefan Gerlach, Marvin Goodfriend, Ping He, Don Morgan, Alexandra Niessen, George Pennacchi, Rafael Repullo, David Skeie, and Javier Suarez for helpful comments as well as seminar participants at the Second Financial Intermediation Research Society Conference on Banking, Corporate Finance and Intermediation, CEMFI, Deutsche Bundesbank, “The Credit Channel of Monetary Policy in the 21st Century” Conference organized by the Federal Reserve Bank of Atlanta, Federal Reserve Bank of New York, 22nd Congress of the European Economic Association, “Banking and the Macroeconomy” conference organized by the CEPR and CER‐ETH, “Banking and Asset Markets” conference organized by the CEPR, Banque de France and Fondation Banque de France, “The Implications of Changes in Banking and Financing for the Monetary Policy Transmission Mechanism” conference organized by the European Central Bank, and the Midwest Finance Association 57th Annual Meeting for discussions and comments. Financial support from the Spanish Ministry under grant SEJ2005‐03924 is gratefully acknowledged by the first author, and Centro de Estudos Macroeconómicos e Previsão (CEMPRE) is a research centre supported by Fundação para a Ciência e a Tecnologia, which is financed by Portuguese Government funds and by European Union funds, within the framework of Programa Operacional Ciência e Inovação 2010. Financial support from Fundação para a Ciência e a Tecnologia‐Programa Praxis XXI ‐ III Quadro Comunitário de Apoio, sponsored by the European Social Fund together with Ministério da Ciência, Tecnologia e Ensino Superior (BD/15698/98) is gratefully acknowledged by the second author.
Abstract
This paper analyzes the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections induce an equilibrium with rationing in the credit market. This has two major implications: first, it reconciles the irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy (magnitude effect), and second, it shows that banks' liquidity positions condition their reaction to monetary policy (Kashyap and Stein liquidity effect).
