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Imperfect interbank markets and the lender of last resort

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  • Matsuoka, Tarishi

Abstract

This paper presents a monetary model in which interbank markets have limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.

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  • Matsuoka, Tarishi, 2012. "Imperfect interbank markets and the lender of last resort," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1673-1687.
    • Handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1673-1687
    DOI: 10.1016/j.jedc.2012.05.003
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    Cited by:

    1. Makoto (M.) Watanabe & Tarishi Matsuoka, 2019. "Banking Panics and the Lender of Last Resort in a Monetary Economy," Tinbergen Institute Discussion Papers 19-002/V, Tinbergen Institute.
    2. Tarishi Matsuoka & Makoto Watanabe, 2017. "Banking Panics and Liquidity in a Monetary Economy," CESifo Working Paper Series 6722, CESifo.
    3. Yuri Biondi & Feng Zhou, 2019. "Interbank credit and the money manufacturing process: a systemic perspective on financial stability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(3), pages 437-468, September.
    4. Matsuoka, Tarishi & Watanabe, Makoto, 2019. "Banking crises and liquidity in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    5. Makoto WATANABE & Tarishi Matsuoka, 2023. "A Monetary Equilibrium with the Lender of Last Resort," CIGS Working Paper Series 23-010E, The Canon Institute for Global Studies.
    6. Eisei Ohtaki, 2016. "Optimality of the Friedman rule under ambiguity," Working Papers e103, Tokyo Center for Economic Research.
    7. Matsuoka, Tarishi, 2022. "Asset prices and standing facilities in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    8. Eisei Ohtaki, 2023. "Climate change, financial intermediation, and monetary policy," Working Papers e179, Tokyo Center for Economic Research.

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    More about this item

    Keywords

    Overlapping generations; Money; Interbank markets; Limited commitment; The lender of last resort;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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