Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098922 | Journal of Economic Dynamics and Control | 2012 | 15 Pages |
Abstract
This paper presents a monetary model in which interbank markets have limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Tarishi Matsuoka,