Bank Liquidity, Interbank Markets, and Monetary Policy
A lesson of the recent financial crisis is that the interbank market is crucial for banks facing uncertainty regarding their liquidity needs. This article studies the efficiency of the interbank market in allocating funds. We show that the central bank should lower the interbank rate when confronted with a crisis that causes a disparity in the liquidity held among banks. This suggests that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. We also show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
Year of publication: |
2011
|
---|---|
Authors: | Freixas, Xavier ; Martin, Antoine ; Skeie, David |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 24.2011, 8, p. 2656-2692
|
Publisher: |
Society for Financial Studies - SFS |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Bank liquidity, interbank markets, and monetary policy
Freixas, Xavier, (2009)
-
Bank liquidity, interbank markets, and monetary policy
Freixas, Xavier, (2009)
-
Bank liquidity, interbank markets and monetary policy
Freixas, Xavier, (2010)
- More ...