Strategic Allocation of Liquidity in the Inter-Bank Money Market

25 Pages Posted: 15 May 2009

See all articles by Indrajit Mallick

Indrajit Mallick

Centre for Studies in Social Sciences Calcutta

Date Written: May 4, 2009

Abstract

This paper focuses on an ex post trading problem in inter-bank money markets. An “over the counter” inter-bank market is modeled in this paper. Relationship banking leads to private proprietary information that causes bargaining failure in such markets with positive probability. Both independent and interdependent bargaining games are studied. It is shown that the allocation is not constrained efficient under bargaining games without monetary intervention. Monetary intervention is characterized as state contingent market making by the Central Bank. Such intervention is shown to dominate under a variety of informational and bargaining assumptions. The literature on monetary policy design is thus extended in the present paper by providing a micro-rationale for Central Bank intervention and by characterizing the solution of state contingent market making in liquidity.

Keywords: Liquidity, Incomplete Information, Bargaining Failure, Central Bank, Monetary Intervention, Market Making

JEL Classification: E5, G1, G2

Suggested Citation

Mallick, Indrajit, Strategic Allocation of Liquidity in the Inter-Bank Money Market (May 4, 2009). Available at SSRN: https://ssrn.com/abstract=1398766 or http://dx.doi.org/10.2139/ssrn.1398766

Indrajit Mallick (Contact Author)

Centre for Studies in Social Sciences Calcutta ( email )

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