With a stochastic general equilibrium model, we highlight the role of both monetary policy and banks in determining the relationship between the federal funds rate and bank reserves. Monetary policy consists of a stochastic upward-sloping supply schedule for reserves, along with a discount...

Financial markets and financial intermediation may be competing mechanisms in the provision of liquidity insurance and their co-existence may adversely impact risk-sharing. The question studied here is what is the optimal central bank policy when there is private information about liquidity...