Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking

Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking Abstract We study interbank lending and asset sales markets in which banks with surplus liquidity have market power vis-à-vis banks needing liquidity, frictions arise in lending due to moral hazard, and assets are bank-specific. Surplus banks ration lending and instead purchase assets from needy banks, an inefficiency more acute during financial crises. A central bank acting as a lender-of-last-resort can ameliorate this inefficiency provided it is prepared to extend potentially loss-making loans or is better informed than outside markets, as might be the case if it also performs a supervisory role. This rationale for central banking finds support in historical episodes. (JEL E58, G01, G21, G28, L13, N21 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking

Loading next page...
 
/lp/american-economic-association/imperfect-competition-in-the-interbank-market-for-liquidity-as-a-TKb46XGEJ9

References

References for this paper are not available at this time. We will be adding them shortly, thank you for your patience.

Publisher
American Economic Association
Copyright
Copyright © 2012 by the American Economic Association
Subject
Articles
ISSN
1945-7715
eISSN
1945-7715
DOI
10.1257/mac.4.2.184
Publisher site
See Article on Publisher Site

Abstract

Abstract We study interbank lending and asset sales markets in which banks with surplus liquidity have market power vis-à-vis banks needing liquidity, frictions arise in lending due to moral hazard, and assets are bank-specific. Surplus banks ration lending and instead purchase assets from needy banks, an inefficiency more acute during financial crises. A central bank acting as a lender-of-last-resort can ameliorate this inefficiency provided it is prepared to extend potentially loss-making loans or is better informed than outside markets, as might be the case if it also performs a supervisory role. This rationale for central banking finds support in historical episodes. (JEL E58, G01, G21, G28, L13, N21 )

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Apr 1, 2012

There are no references for this article.