Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152812
Authors: 
Ewerhart, Christian
Cassola, Nuno
Ejerskov, Steen
Valla, Natacha
Year of Publication: 
2004
Series/Report no.: 
ECB Working Paper 378
Abstract: 
We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generate an overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.
Subjects: 
Asymmetric information
liquidity effect
monetary policy implementation
JEL: 
G14
G21
E52
Document Type: 
Working Paper

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