TY - UNPD A1 - Bluhm, Marcel A1 - Faia, Ester A1 - Krahnen, Jan Pieter T1 - Monetary policy implementation in an interbank network: effects on systemic risk : [version 26 march 2014] T2 - SAFE working paper series ; No. 46 N2 - This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk. T3 - SAFE working paper - 46 Y1 - 2014 UR - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33827 UR - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-338276 UR - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417219 IS - version 26 march 2014 PB - SAFE CY - Frankfurt am Main ER -