Simulating interbank money market interest rate using search models within a Nash-Equilibrium framework

Document Type : Research Paper


1 Faculty of Management - University of Tehran

2 Faculty of Economics- University if Tehran

3 Faculty of Economics-Imam Sadeq University

4 Ph.d student in Finance


The interbank market is a part of the money market in which banks and credit institutions enter into transactions to finance and consume surplus resources in the short term with the aim of balancing their liquidity situation.
In a corridor framework of monetary policy, the central bank sets interbank money market (IBMM) interest rate and also implements open market operation (OMO) to direct market interest rate towards the policy rate. Hence estimation of IBMM equilibrium interest rate is the most important challenge in monetary policy making. In order to model the interbank market in Iran, this research provides a 4-periods search model, including shocks, searching for counterparty, bargaining and settlement with central bank, and it simulates Iranian banks’ behavior to derive Iran’s interbank rate from 2017 to 2019.
The results show that the model-driven lending rate of large banks is higher than their borrowing rate which is consistent with rational behavior of the banks, while the actual rates are the same in both cases that implies distortion in interest rate policy making by Iran central bank.


Main Subjects

  1. Afonso, G., Kovner, A., & Schoar, A. (2012). The Importance of Trading Relationships in the Fed Funds Market. Mimeo. Federal Reserve Bank of New York.
  2. Afonso, G., & Lagos, R. (2012). An Empirical Study of Trade Dynamics in the Fed Funds Market. Mimeo. Federal Reserve Bank of New York.
  3. Afonso, G., & Lagos, R. (2015). Trade dynamics in the market for federal funds. Econometrica, 83 (1), 263–313.
  4. Armenter, R., & Lester, B. (2017). Excess reserves and monetary policy normalization. Review of Economic Dynamics, 23, 212–235.
  5. Bech, M., & Keister, T. (2012). The Liquidity Coverage Ration and Monetary Policy. Mimeo. Bank for International Settlements.
  6. Bech, M., & Klee, E. (2011). The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market. Journal of Monetary Eco-nomics, 58, 415–431.
  7. Berentsen, A., Marchesiani, A., & Waller, C. (2011). Floor systems for implementing monetary policy: some unpleasant fiscal arithmetic. Review of Economic.
  8. Berentsen, A., & Monnet, C. (2008). Monetary policy in a channel system. Journal of Monetary Economics, 55, 1067–1080.
  9. Blasques, F., Bräuning, F., & Lelyveld, I. (2018). A dynamic network model of the unsecured interbank lending market. Journal of Economic Dynamics and Control, 90, 310-342.
  10. Boss, M., Elsinger, H., Summer, M., & Thurner 4, S. (2004). Network topology of the interbank market. Quantitative finance4(6), 677-684.
  11. Craig, B., Fecht, F., & Tümer-Alkan, G. (2015). The role of interbank relationships and liquidity needsJournal of Banking & Finance17 (3), 523–542.
  12. Haidar, J.I. (2009). The mark-to-market valuation and executive pay package regulations within the 2009 US (Bailout) Emergency Economic Stabilization Act. Journal of Economic Policy Reform, 12(3), 189–199.
  13. Hamilton, J.D. (1996). The daily market for federal funds. Journal of Political Economy, 104, 26–56.
  14. Hong, F., & Shanshan, J. (2019). Systemic Risk in the Interbank Market with Overlapping Portfolios. Complexity 2019, 1-12.
  15. Jonathan, C., Jens, E., & Cyril, M. (2020). Relationships in the Interbank Market. Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, 35, 170-191.
  16. Li, Y., Rocheteau, G., & Weill, P. O. (2012). Liquidity and the threat of fraudulent assets. Journal of Political Economy, 120, 815–846.
  17. Liu, A., Mo, C. Y., Paddrik, M. E., & Yang, S. Y. (2017). Interbank market formation through reinforcement learning and risk aversion. Stevens Institute of Technology School of Business Research Paper.
  18. Mousaviyan, S. A., & Elahi, M. (2010). Jurisprudential feasibility of forming an interbank market in Islamic banking. Journal of Islamic Economics, 10 (38), 118-89 (In Persian).
  19.  Mousavian, S. A., Katozian, M. R., Talebi, M., &  Hajian, M. R. (2015). Repurchase agreement (repo) in the Islamic interbank market. Journal of Islamic Economics, 15 (60), 111-81 (In Persian).
  20. Mousavian, S. A., & Hossein, M. (2017). Islamic Banking (2): Islamic Central Banking and Monetary and Foreign Exchange Policy. Tehran, Monetary and Banking Research Institute (In Persian).
  21. Poole, W. (1968). Commercial bank reserve management in a stochastic model: implications for monetary policy. Journal of Finance, 23, 769–791.
  22. Shamsinejad, S. S., & Talebi, M. (2016). Using Islamic treasury bonds in the Iranian interbank market. Islamic Financial Research Quarterly, 6 (1), 62 – 33 (In Persian).
  23. Xu, T., He, J., & Li, S. (2016). A dynamic network model for interbank market. Physica A: Statistical Mechanics and its Applications, 463, 131-138.