Liquidity, Interbank Market, and Capital Formation

Abstract

This paper presents a monetary model that links interbank markets to capital accumulation and growth. The purpose of this paper is to study how interbank markets affect real economic activities, and to find the monetary policy implications. The model shows that, in a stationary equilibrium, the economy with interbank markets attains higher capital stock than the economy without the markets, because of precautionary money savings. In addition, I find that inflationary policy is more desirable in the economy without well-functioning interbank markets.