Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/95864
Authors: 
Bluhm, Marcel
Faia, Ester
Krahnen, Jan Pieter
Year of Publication: 
2014
Series/Report no.: 
SAFE Working Paper Series 46
Abstract: 
This paper makes a conceptual contribution to the e ffect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the bene ficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives.We fi nd that central bank supply of liquidity quite generally increases systemic risk.
Subjects: 
network formation
contagion
central banks' interventions
JEL: 
C63
D85
G01
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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