The Role of Interbank Markets in Monetary Policy: A Model With Rationing

Journal of Money, Credit and Banking, Vol. 40, No. 6, pp. 1151-1176, 2008

Posted: 26 Jul 2007 Last revised: 13 Feb 2009

See all articles by Xavier Freixas

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

José Jorge

Universidade do Porto, Faculdade de Economia. CEF.UP

Date Written: 2008

Abstract

This paper analyses 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).

Keywords: Banking, Rationing, Monetary Policy

JEL Classification: E44, G21

Suggested Citation

Freixas, Xavier and Jorge, José, The Role of Interbank Markets in Monetary Policy: A Model With Rationing (2008). Journal of Money, Credit and Banking, Vol. 40, No. 6, pp. 1151-1176, 2008. Available at SSRN: https://ssrn.com/abstract=1003124

Xavier Freixas (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~freixas

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

José Jorge

Universidade do Porto, Faculdade de Economia. CEF.UP ( email )

Faculdade Economia
Rua Dr Roberto Frias
Porto, 4200-464
Portugal
+351 225 571 100 (Phone)
+351 225 505 050 (Fax)

HOME PAGE: http://https://sigarra.up.pt/fep/pt/FUNC_GERAL.FORMVIEW?p_codigo=235892

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