In this paper we show how interbank market frictions can play an important role in propagating and enhancing the effects of shocks in a currency union, and discuss the efficacy of two unconventional policy measures; multi-period central bank refinance operations and large scale asset purchases....

In this paper we present a methodology of model-based calibration of additional capital needed in an interconnected financial system to minimize potential contagion losses. Building on ideas from combinatorial optimization tailored to controlling contagion in case of complete information about...

This paper proposes rules for the control of interbank rate volatility under different interest corridor systems when volatility stems from interbank market frictions. Friction-induced volatility will occur if there is heterogeneity in two dimensions (across banks and time) with respect to the...

This paper studies a central bank's optimal interest rate corridor choice in the presence of an endogenous interbank network. We first provide a characterization of the unique equilibrium of banks' liquidity holdings for any network of credit lines. Then, we endogenize the network and show that...

We develop a model in which financial intermediaries hold liquidity to protect themselves from shocks. Depending on parameter values, banks may choose to hold too much or too little liquidity on aggregate compared with the socially optimal amount. The model endogenously generates a situation of...

We introduce a dynamic network model of interbank lending and estimate the parameters by indirect inference using network statistics of the Dutch interbank market from mid-February 2008 through April 2011. We find that credit-risk uncertainty and peer monitoring are significant factors in...