The Role of Interbank Markets in Monetary Policy: A Model with Rationing |
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| Authors: | XAVIER FREIXAS,JOSÉ JORGE&dagger |
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| Affiliation: | Xavier Freixas;is Professor of Financial Economics, Department of Economics and Business, Universitat Pompeu Fabra, and Research Fellow at CEPR (E-mail: ). JoséJorge;is Assistant Professor, CEMPRE and Faculdade de Economia, Universidade do Porto (E-mail: ). |
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| Abstract: | This paper analyzes 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 ). |
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| Keywords: | E44 G21 |
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