We develop a model in which banks bid for liquidity provided by the central bank in fixed and variable rate auctions, considering liquidity injections and extractions as well as the impact of a subsequent interbank market. We derive the equilibrium demands of banks establishing the prevalence of...

This paper develops a model of interbank lending based on liquidity and profitability considerations of homogeneous banks. We derive the reservation prices of interbank lending and its properties before exploring how, due to an idiosyncratic liquidity shock, banks engage in bilateral lending to...