Fragility of Money Markets

Item Type Monograph (Working Paper)
Abstract

We provide the first comprehensive theoretical model for money markets encompassing unsecured and secured funding, asset markets, and central bank policy. In our model, leveraged banks invest in assets and raise short-term funds by borrowing in the unsecured and secured money markets. We derive how funding liquidity across money markets is related, explain how a shock to asset values can lead to mutually reinforcing liquidity spirals in both money markets, and show how borrowers' flight-to-safety and risk-seeking behavior impacts their liability structure. We derive the socially optimal leverage ratio and funding structure, and show which combination of conventional and unconventional monetary policies and regulatory measures can reduce money market fragility.

Authors Ranaldo, Angelo; Rupprecht, Matthias & Wrampelmeyer, Jan
Language English
Subjects economics
finance
Institute/School ?? Inst SBF AR ??
?? STUDENT ??
s/bf - Swiss Institute of Banking and Finance
?? SoF Pr Inst ??
HSG Classification contribution to scientific community
Refereed No
Date 2016
Publisher SoF-HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Number 1601
Depositing User Prof. Dr. Angelo Ranaldo
Date Deposited 11 Jan 2016 11:30
Last Modified 20 Feb 2018 01:21
URI: https://www.alexandria.unisg.ch/publications/246613

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Citation

Ranaldo, Angelo; Rupprecht, Matthias & Wrampelmeyer, Jan: Fragility of Money Markets. School of Finance Working Paper Series, 2016, 1601.

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https://www.alexandria.unisg.ch/id/eprint/246613
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