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Cross-country differences in monetary policy execution and money market rates' volatility

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  • Bartolini, Leonardo
  • Prati, Alessandro

Abstract

The volatility patterns of overnight interest rates differ across industrial countries in ways that existing models, designed to replicate the features of the U.S. federal funds market, cannot explain. This paper presents an equilibrium model of the overnight interbank market that matches these different patterns by incorporating differences in policy execution by the world's main central banks, including differences in central banks' management of marginal lending and deposit facilities in response to shocks. Our model is consistent with central banks' observed practice of rationing access to marginal facilities when the objective of stabilizing short-term interest rates conflicts with another high-frequency objective, such as the targeting of exchange rates.
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  • Bartolini, Leonardo & Prati, Alessandro, 2006. "Cross-country differences in monetary policy execution and money market rates' volatility," European Economic Review, Elsevier, vol. 50(2), pages 349-376, February.
    • Handle: RePEc:eee:eecrev:v:50:y:2006:i:2:p:349-376
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    Cited by:

    1. International Monetary Fund, 2012. "Republic of Poland: Selected Issues," IMF Staff Country Reports 2012/163, International Monetary Fund.
    2. Green, Christopher & Bai, Ye & Murinde, Victor & Ngoka, Kethi & Maana, Isaya & Tiriongo, Samuel, 2016. "Overnight interbank markets and the determination of the interbank rate: A selective survey," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 149-161.
    3. Caroline Jardet & Gaelle Le Fol, 2010. "Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 316-330.
    4. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, Transparency and the Improved Operational Framework: A Look at Overnight Volatility Transmission," International Finance, Wiley Blackwell, vol. 12(2), pages 151-170, August.
    5. Nautz, Dieter & Schmidt, Sandra, 2009. "Monetary policy implementation and the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1274-1284, July.
    6. Dieter Nautz & Christian J. Offermanns, 2007. "The dynamic relationship between the euro overnight rate, the ECB's policy rate and the term spread," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(3), pages 287-300.
    7. Piti Disyatat, 2008. "Monetary policy implementation: Misconceptions and their consequences," BIS Working Papers 269, Bank for International Settlements.
    8. Ulrike Neyer, 2009. "Interest on Reserves and the Flexibility of Monetary Policy in the Euro Area," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(2), pages 417-438, June.
    9. Abbassi, Puriya & Nautz, Dieter, 2012. "Monetary transmission right from the start: On the information content of the Eurosystem's main refinancing operations," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 54-69.
    10. Indranil Bhattacharyya & Mohua Roy & Himanshu Joshi & Michael Patra, 2009. "Money market microstructure and monetary policy: the Indian experience," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(1), pages 59-77.
    11. Cassola, Nuno & Morana, Claudio, 2010. "Comovements in volatility in the euro money market," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 525-539, April.
    12. Guender, Alfred V. & Rimer, Oyvinn, 2008. "The implementation of monetary policy in New Zealand: What factors affect the 90-day bank bill rate?," The North American Journal of Economics and Finance, Elsevier, vol. 19(2), pages 215-234, August.
    13. Nautz, Dieter & Scheithauer, Jan, 2011. "Monetary policy implementation and overnight rate persistence," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1375-1386.
    14. Nathan Porter & TengTeng Xu, 2016. "Money-Market Rates and Retail Interest Regulation in China: The Disconnect between Interbank and Retail Credit Conditions," International Journal of Central Banking, International Journal of Central Banking, vol. 12(1), pages 143-198, March.
    15. Ronald Heijmans & Lola Hernández & Richard Heuver, 2013. "Determinants of the rate of the Dutch unsecured overnight money market," DNB Working Papers 374, Netherlands Central Bank, Research Department.
    16. Asif Mahmood, 2016. "Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 1-18.
    17. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2020. "Persistence and Long Memory in Monetary Policy Spreads," CESifo Working Paper Series 8664, CESifo.
    18. Kotomin, Vladimir & Winters, Drew B., 2007. "The impact of the return to lagged reserve requirements on the federal funds market," Journal of Economics and Business, Elsevier, vol. 59(2), pages 111-129.
    19. Miss Yinqiu Lu, 2012. "What Drives the POLONIA Spread in Poland?," IMF Working Papers 2012/215, International Monetary Fund.
    20. Aries Haryadi & Sahabudin Sidiq, 2013. "Inter-bank call money market transaction in Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 5(2), pages 92-98, April.
    21. Brämer, Patrick & Gischer, Horst & Richter, Toni & Weiß, Mirko, 2013. "Competition in banks’ lending business and its interference with ECB monetary policy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 144-162.
    22. Osborne, Matthew, 2016. "Monetary policy and volatility in the sterling money market," Bank of England working papers 588, Bank of England.
    23. Saurabh Ghosh & Indranil Bhattacharyya, 2009. "Spread, volatility and monetary policy: empirical evidence from the Indian overnight money market," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(2), pages 257-277.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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