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Type Working Paper
Scope Discipline-based scholarship
Title Liquidity, Information, and the Overnight Rate
Organization Unit
Authors
  • Christian Ewerhart
  • Nuno Cassola
  • Steen Ejerskov
  • Natacha Valla
Language
  • English
Institution University of Zurich
Series Name Working paper series / Institute for Empirical Research in Economics
Number No. 186
ISSN 1424-0459
Date 2004
Abstract Text We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank justntrades to compensate its liquidity imbalance, while a sophisticated bank willnexploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generatenan overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.
Official URL http://www.econ.uzh.ch/wp.html
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