A Macro-Financial Model of Monetary Policies with Leveraged Intermediaries
Matthieu Darracq Pariès  1@  , Quentin Vandeweyer@
1 : European Central Bank

This article presents a macro-financial model in which leveraged interme-diaries play the key role in the transmission of monetary policies. Liquid-ity frictions in the money market create a role for central bank reserves as the ultimate mean of settlement. The model is able to reproduce and rationalize a series of facts both in normal times and in financial crises:(i) monetary policy can be implemented by manipulating both the inter-est paid on excess reserves (IOER) and the quantity of excess reserves (ii) a strong correlation between money market stresses and credit spreads (iii) a spiraling doom loop between funding and market liquidity (iv) liquidity injection from central banks alleviating liquidity stresses and (v) asset purchase programmes stabilizing asset prices by extracting and suppressing funding liquidity risk from the market.

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