I. Mallick (India)
Liquidity, Bargaining, Central Bank, Monetary Intervention, Information
The theoretical literature on inter-bank markets mainly deal with risk sharing problems. This paper focuses on an ex-post trading problem. A static Over The Counter (OTC) inter-bank market is modeled in this paper. Relationship banking leads to private proprietary information that causes bargaining failure with positive probability. Both independent and interdependent bargaining games are studied. It is shown that the allocation is not constrained efficient. The superiority of regulatory intervention persists when the Central Bank is information constrained as well as when there is differential information. The optimal monetary mechanism is defined and characterized for such cases. The paper uses the methodology of mechanism design literature and theory of bargaining under incomplete information. The results indicate that ex ante view of the market should be supplemented with properties of the ex post trading mechanisms. The literature on monetary policy design is thus extended in the present paper by providing a micro-rationale for intervention: the optimal liquidity (re)allocation role of the Central Bank.
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