Monetary policy and cross-border interbank market fragmentation: lessons from the crisis

Jonathan Swarbrick, Tobias Blattner

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    Abstract

    We present a two-country model featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) asset purchases and central bank long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy.
    Original languageEnglish
    Pages (from-to)323-368
    Number of pages46
    JournalThe B.E. Journal of Macroeconomics
    Volume21
    Issue number1
    DOIs
    Publication statusPublished - 22 Sept 2020

    Keywords

    • Cross-border capital flows
    • Financial frictions
    • Interbank market
    • Monetary union
    • Unconventional monetary policy

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