Money, Banks and Finance in Economic Thought

The role of the interbank money market: some examples from the history of economic thought

Diatkine Sylvie, University East Paris

23rd Annual Conference of the European Society for the History of Economic Thought Lille, 23-25 May 2019. The role of the interbank money market: some examples from the history of economic thought Sylvie Diatkine (University Paris Est Créteil and PHARE, University Paris 1) Abstract One of the aspects of the 2007-2008 crisis, was a major liquidity crisis that has occurred on the interbank money market which has been blocked. That is why the central banks massively intervened to provide liquidity to this market. So this crisis reminded the profession that this market is at the center of the payments system and, consequently this underlined the role of banks in a monetary economy. However this money market as a special market for liquidity for banks where all short-term liquidity fluctuations are adjusted and where the central bank is a lender of last resort had not been integrated in academic literature prior to 2007. Moreover, references to the interbank money market are not so easy to find in the history of economic thought. Nevertheless, we can point a tradition among classical economists which stresses the role of banks as liquidity providers and, as a result, study this interbank money market. This tradition continued until the end of the nineteenth century and the beginning of the twentieth. However, later and progressively, this vision regressed in economic analysis. Macroeconomics often referred to a banking system taken as a whole or to a global supply of money. Microeconomics studied financial behavior in general and not specifically of banks, through portfolio models building micro foundations of the demand for cash balances. It is only recently that the importance of banks for the macroeconomic equilibrium and the means of transmission of monetary policy have once again become the object of studies and that new developments of microeconomics of banking have allowed the analysis of liquidity risks that banks face. In this contribution I intend to study some examples of the way economists understand the role of the interbank money market. In this respect I will select some economists of the past or of recent economic thought. First, I will precise the vision and the importance of the money market in the classical tradition. I will show that it is the result of their vision of banks and of their explanations of banking crises as liquidity crises. Second I will study to what extent the money market has regressed later in the works of Keynes, in his evolution from the Treatise on Money to the General Theory, and of Keynesian economists Thirdly, I will try to appreciate how the recent new microeconomics of banking deals with the liquidity risk and the crisis on the interbank money market.

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Keywords: interbank money market, banking theory, liquidity crises, classical monetary thought, Keynes, microeconomics of banking

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