Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis

50 Pages Posted: 18 Apr 2018

See all articles by Tobias Sebastian Blattner

Tobias Sebastian Blattner

European Central Bank (ECB) - Directorate General Economics

Jonathan Swarbrick

Bank of Canada

Date Written: April 06, 2018

Abstract

We present a two-country model with an enhanced banking sector featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) central bank asset purchases and long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy.

Keywords: interbank market, monetary union, financial frictions, cross-border capital flows, unconventional monetary policy

JEL Classification: E44, E52, F32, F36

Suggested Citation

Blattner, Tobias Sebastian and Swarbrick, Jonathan, Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis (April 06, 2018). ECB Working Paper No. 2139, ISBN: 978-92-899-3244-8, Available at SSRN: https://ssrn.com/abstract=3161268

Tobias Sebastian Blattner (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Jonathan Swarbrick

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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