Monetary policy implementation in an interbank network: Effects on systemic risk

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 46

Classification and Topics

• Classification: Wirtschaft ; Computational Techniques; Simulation Modeling ; Network Formation and Analysis: Theory ; Financial Crises ; Financial Institutions and Services: Government Policy and Regulation
• Subject: network formation ; contagion ; central banks' interventions

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bluhm, Marcel ; Faia, Ester ; Krahnen, Jan Pieter
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
• (where): Frankfurt a. M.
• (when): 2014

Further information

• DOI: doi:10.2139/ssrn.2417219
• Handle: http://hdl.handle.net/10419/95864
• Last update: 10.03.2025, 11:45 AM CET