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Assortative Matching, Interbank Markets, and Monetary Policy

Author

Listed:
  • Christian Bittner

    (Deutsche Bundesbank & Goethe University Frankfurt)

  • Rustam Jamilov

    (University of Oxford)

  • Farzad Saidi

    (University of Bonn & CEPR)

Abstract

We develop a quantitative macroeconomic framework with heterogeneous financial intermediaries and active liquidity management. In the model, banks manage uninsured, idiosyncratic deposit withdrawal risk through an iterative over-the-counter interbank market with endogenous intensive and extensive margins and equilibrium assortative matching based on balance sheet size. We validate our framework using administrative data from Germany encompassing the universe of bank-to-bank exposures. Our findings strongly support the presence of assortative matching in the data, thereby confirming the model's key mechanism. We show that assortative matching can inefficiently lead to reduced trading volumes and a broader region of inaction in the interbank market, a smaller and riskier banking sector, and a macroeconomy characterized by lower aggregate output. Using our empirically validated framework, we explore secular trends in interbank trading, the roles of liquidity and interest rate corridor policies, and the impact of deposit market power.

Suggested Citation

  • Christian Bittner & Rustam Jamilov & Farzad Saidi, 2025. "Assortative Matching, Interbank Markets, and Monetary Policy," ECONtribute Discussion Papers Series 353, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:353
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_353_2025.pdf
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    References listed on IDEAS

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    4. Ciccarelli, Matteo & Maddaloni, Angela & Peydró, José-Luis, 2013. "Heterogeneous transmission mechanism: monetary policy and financial fragility in the euro area," Working Paper Series 1527, European Central Bank.
    5. Vadim Elenev & Tim Landvoigt & Stijn Van Nieuwerburgh, 2021. "A Macroeconomic Model With Financially Constrained Producers and Intermediaries," Econometrica, Econometric Society, vol. 89(3), pages 1361-1418, May.
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    More about this item

    Keywords

    Heterogeneous banks; interbank markets; monetary policy; liquidity policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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