Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis

Author:

Blattner Tobias S.1,Swarbrick Jonathan M.2ORCID

Affiliation:

1. European Central Bank , Sonnemannstrasse 20 , 60314, Frankfurt am Main , Hessen , Germany

2. Bank of Canada , 234 Wellington Street West , Ottawa , ON, K1A 0G9 , Canada

Abstract

Abstract We present a two-country model featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) asset purchases and central bank long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy.

Publisher

Walter de Gruyter GmbH

Subject

Economics and Econometrics

Reference62 articles.

1. Abbassi, P., F. Bräuning, F. Fecht, and J.-L. Peydró. 2014. “Cross-border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis.” Deutsche Bundesbank, Discussion Paper Series 45/2014.

2. Adjemian, S., H. Bastanie, F. Karamé, M. Juillard, J. Maih, F. Mihoubi, G. Perendia, J. Pfeifer, M. Ratto, and S. Villemot. 2011. “Dynare: Reference Manual Version 4.” 160. Dynare Working Paper Series (1).

3. Afonso, G., A. Kovner, and A. Schoar. 2011. “Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis.” The Journal of Finance 66 (4): 1109–39, https://doi.org/10.1111/j.1540-6261.2011.01670.x.

4. Al-Eyd, A. J., and P. Berkmen. 2013. Fragmentation and Monetary Policy in the Euro Area. Washington D.C: International Monetary Fund, Working Paper 13/208.

5. Altavilla, C., G. Carboni, and R. Motto. 2015. Asset Purchase Programmes and Financial Markets: Lessons from the Euro Area. Frankfurt am Main: European Central Bank, Working Paper Series, No. 1864.

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