Interbank market and funding liquidity risk in a stock-flow consistent model

Abstract

The present stock-flow consistent model aims at capturing the second causal link of endogenous monetary theory, from deposits to reserves, by including intrasectoral flows within the banking sector and debt maturity structure decisions. For this purpose, banks can choose the demanded duration of interbank loans, either overnight or term, according to a measure for maturity mismatch which captures funding liquidity risk. The simulations show that: (i) a well-functioning term interbank market is needed when banks face exogenous shocks; and (ii) banks’ funding structure may act as an endogenous source of credit market pressures.