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The Role of Interbank Markets in Monetary Policy: A Model with Rationing

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  • XAVIER FREIXAS
  • JOSÉ JORGE

Abstract

This paper analyzes the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections induce an equilibrium with rationing in the credit market. This has two major implications: first, it reconciles the irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy (magnitude effect), and second, it shows that banks' liquidity positions condition their reaction to monetary policy (Kashyap and Stein liquidity effect).

Suggested Citation

  • Xavier Freixas & José Jorge, 2008. "The Role of Interbank Markets in Monetary Policy: A Model with Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1151-1176, September.
    • Handle: RePEc:wly:jmoncb:v:40:y:2008:i:6:p:1151-1176
    DOI: 10.1111/j.1538-4616.2008.00152.x
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