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Interbank Lending and the Demand for Central Bank Loans - a Simple Microfoundation

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  • Markus Pasche

    (School of Economics and Business Administration, Friedrich-Schiller-University Jena)

Abstract

The paper presents a simple model of banking behavior where portfolio, liquidity, and liability management determine simultaneously the demand and supply of borrowed reserves on the interbank market. As the central bank is one player in this market due to its refinancing policy, it is able to determine the interest rate and henceforth the residual demand for central bank loans. Comparative static analysis shows how external or monetary policy shocks affect the behavior on the interbank market, the volume as well as the structure of the bank's balance sheet. It turns out that the banking firm behavior is non-linear and partially non-monotonous, indicating that the transmission of monetary measures is more complex when endogeneous banking behavior is taken into account.

Suggested Citation

  • Markus Pasche, 2010. "Interbank Lending and the Demand for Central Bank Loans - a Simple Microfoundation," Jena Economics Research Papers 2010-070, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2010-070
    as

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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2010/wp_2010_070.pdf
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    References listed on IDEAS

    as
    1. van Damme, Eric, 1994. "Banking: A Survey of Recent Microeconomic Theory," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 10(4), pages 14-33, Winter.
    2. Krainer, Robert, 2009. "Portfolio and financing adjustments for U.S. banks: Some empirical evidence," Journal of Financial Stability, Elsevier, vol. 5(1), pages 1-24, January.
    3. Jürgen von Hagen, 2009. "The monetary mechanics of the crisis," Policy Contributions 320, Bruegel.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banking firm; balance sheet; interbank market; borrowed reserves; central banking; liquidity; transmission;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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