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

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 using 2017-2019 period data.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.