An Adverse Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy

41 Pages Posted: 12 Jul 2000 Last revised: 17 Mar 2008

See all articles by Jeremy C. Stein

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 1995

Abstract

This paper develops a model of bank asset and liability management, based on the idea that information problems make it difficult for banks to raise funds with instruments other than insured deposits. The model can be used to address the question of how monetary policy works. One effect it captures is that when the Fed reduces reserves, this tightens banks' financing constraints and thereby leads to a cutback in bank lending -- this is the 'bank lending channel' in action. However, in addition to providing a specific set of microfoundations for the lending channel, the model also yields a novel account of how monetary policy affects bond-market interest rates.

Suggested Citation

Stein, Jeremy C., An Adverse Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy (August 1995). NBER Working Paper No. w5217. Available at SSRN: https://ssrn.com/abstract=225281

Jeremy C. Stein (Contact Author)

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