Excess liquidity, bank pricing rules, and monetary policy

Pierre Richard Agénor, Karim El Aynaoui

Research output: Contribution to journalArticlepeer-review


This paper studies the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections. The demand for excess reserves is determined by precautionary factors and the opportunity cost of holding cash. It is argued that excess liquidity may impart greater stickiness to the deposit rate in response to a monetary contraction and induce an easing of collateral requirements on borrowers - which in turn may translate into a lower risk premium and lower lending rates. As a result, asymmetric bank pricing behavior under excess liquidity may hamper the ability of a contractionary monetary policy to lower inflation. © 2009.
Original languageEnglish
Pages (from-to)923-933
Number of pages10
JournalJournal of Banking and Finance
Issue number5
Publication statusPublished - May 2010


  • Bank interest rates
  • Excess liquidity
  • Monetary policy


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