Unconventional Monetary Policy and Funding Liquidity Risk

56 Pages Posted: 4 Jan 2020

See all articles by Adrien d'Avernas

Adrien d'Avernas

Swedish House of Finance

Quentin Vandeweyer

University of Chicago - Booth School of Business

Matthieu Darracq Paries

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: January, 2020

Abstract

This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities.

Keywords: asset pricing, money markets, quantitative easing, shadow banks

JEL Classification: E43, E44, E52, G12

Suggested Citation

d'Avernas, Adrien and Vandeweyer, Quentin and Darracq Paries, Matthieu, Unconventional Monetary Policy and Funding Liquidity Risk (January, 2020). ECB Working Paper No. 2350, Available at SSRN: https://ssrn.com/abstract=3512894

Adrien D'Avernas (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Quentin Vandeweyer

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

Matthieu Darracq Paries

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+496913446631 (Phone)
+496913447604 (Fax)

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