Liquidity Management and Monetary Policy

We develop a new framework to study the implementation of monetary policy through the banking sector. Banks are subject to a maturity mismatch problem that leads to a precautionary holdings of Central Bank reserves. Through various instruments, monetary policy affects real interests and lending by altering tradeoffs bank face between lending, holding reserves, holding deposits and paying dividends. We use this framework to analyze the macroeconomic effects of different monetary policy instruments. We then study how these policy tools interact with shocks to the volatility in the payments system, equity value, the demand for loans and regulatory constraints. We show how we can use a calibrated version of the model to investigate, quantitatively, why have banks accumulate excess reserves and not extended loans despite all the monetary policy efforts post the 2008–2009 crisis.