Does Interbank Market Matter for Business Cycle Fluctuation? An Estimated DSGE Model with Financial Frictions for the Euro Area
نویسنده
چکیده
The aim of this paper is to assess the impact of the interbank market on the business cycle. To do that, we built a DSGE model with heterogeneous households and banks. Net lender banks can allocate their resources between interbank lending and risk free government bonds. This portfolio choice is affected by an exogenous counterpart risk shock on the interbank market. An increase of the counterpart risk diverts funds from the interbank markets toward the government bonds market. This mechanism allows us to capture the freeze of the unsecured interbank market and the flight to quality mechanism underlying the last financial crisis.
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