This paper develops a theoretical model which replicates main institutional features of the euro overnight interbank market and the Eurosystem's operational framework which has been in place since September 2008. Main ingredients of the model are frictions in the form of participation costs in the interbank market, a refinancing operation with unlimited liquidity supply and two standing facilities offered by the central bank. The model can explain several stylized facts observed during the financial crisis as the decline in interbank borrowing and the interbank rate, the increased borrowing from the Eurosystem and the strong recourse to its deposit facility. Furthermore, we discuss some policy implications.
|Number of pages||18|
|Journal||European Journal of Political Economy|
|Early online date||27 Jul 2013|
|Publication status||Published - 1 Jun 2014|
- Monetary policy implementation
- Interbank market
- Financial crisis