Fragility of Money Markets
Series
School of Finance Working Paper Series
Type
working paper
Date Issued
2016
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.
Language
English
HSG Classification
contribution to scientific community
Refereed
No
Publisher
SoF-HSG
Publisher place
St. Gallen
Number
1601
Eprints ID
246613
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open.access
Name
16_01_Ranaldo et al_Fragility of Money Markets_incl_Internet Appendix.pdf
Size
571.45 KB
Format
Adobe PDF
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