Abstract
Market confidence has proved to be an important factor during past economic crises. In this paper, I incorporate a model of the interbank market into a DSGE model, with the volume of lending depending on market confidence. I conduct an exercise to mimic some central bank policies: provision of liquidity and reduction of the reserve rate. My results indicate that policy actions have a limited effect on the supply of credit if they fail to influence agents' expectations. A low reserve rate policy worsens recessions due to its negative impacts on bank revenues.
Authors
- Volha Audzei
JEL codes
- E58
- E65
- E71
- G01