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Liquidity And Announcement Effects In The Euro Area

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  • Paolo Angelini

    ()
    (Bank of Italy - Research Department)

Abstract

Using daily data for the euro area, the paper estimates demand equations for reserves held by commercial banks at the central bank. The presence of the expected overnightrate among the regressors allows to gauge the announcement effect, the ability by thecentral bank to influence the current overnight rate without resorting to open marketoperations, e.g. via the announcement of an official interest rate change, or a speech byone of its top executives. The estimated semi-elasticities to the current and expected ratehave opposite signs and are very similar in absolute value. This implies that central bankstatements affecting the expected overnight rate trigger an arbitrage mechanism wherebythe current rate moves in the same direction and by the same amount, leaving themarket for liquidity in equilibrium without any need for the central bank to resort toliquidity management. The equations are also used to gauge the liquidity effect, the reactionof short-term interest rates to a monetary base shock.

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Bibliographic Info

Article provided by GDE (Giornale degli Economisti e Annali di Economia), Bocconi University in its journal Giornale degli Economisti e Annali di Economia.

Volume (Year): 67 (2008)
Issue (Month): 1 (March)
Pages: 1-20

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Handle: RePEc:gde:journl:gde_v67_n1_p1-20

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Keywords: liquidity effect; announcement effect; overnight rate; interbank market;

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References

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  1. Selva Demiralp & Òscar Jordà, 2002. "The announcement effect: evidence from open market desk data," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 29-48.
  2. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  3. Coleman, Wilbur John, II & Gilles, Christian & Labadie, Pamela A, 1996. "A Model of the Federal Funds Market," Economic Theory, Springer, vol. 7(2), pages 337-57, February.
  4. Vítor Gaspar & Gabriel Perez-Quiros & Jorge Sicilia, 2001. "The ECB monetary policy strategy and the money market," Working Papers 47, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Quiro, G.P. & Mendizabal, H.R., 2001. "The Daily Market for Funds in Europe: Has Something Changed with the EMU," Papers 67, Quebec a Montreal - Recherche en gestion.
  6. Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
  7. Simon Gilchrist, 2001. "Identifying the liquidity effect at the daily frequency (commentary)," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
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Citations

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Cited by:
  1. Jens Tapking, 2004. "Multiple equilibrium overnight rates in a dynamic interbank market game," Finance 0409042, EconWPA.
  2. Stracca, Livio & Ejerskov, Steen & Martin Moss, Clara, 2003. "How does the ECB allot liquidity in its weekly main refinancing operations? A look at the empirical evidence," Working Paper Series 0244, European Central Bank.
  3. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
  4. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Department of Business and Management Science, Norwegian School of Economics.
  5. Gianfranco A. Vento, 2004. "The Eurosystem operational framework, use of colleteral and liquidity distribution in the euro area: towards a single interbank market?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 71-100.
  6. Gianfranco A. Vento, 2004. "The Eurosystem operational framework, use of colleteral and liquidity distribution in the euro area: towards a single interbank market?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 71-100.
  7. Jérôme Vandenbussche & Stanley Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets," IMF Working Papers 09/228, International Monetary Fund.
  8. Leonardo Bartolini & Alessandro Prati, 2003. "The execution of monetary policy: a tale of two central banks," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 435-467, October.
  9. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438 Elsevier.
  10. Livio Stracca & Clara Martin Moss & Livio Stracca, 2004. "Demand and supply in the ECB's main refinancing operations," Money Macro and Finance (MMF) Research Group Conference 2003 94, Money Macro and Finance Research Group.
  11. Giuseppe Bruno & Ernesto Maurizio Ordine & Antonio Scalia, 2005. "BanksÂ’ participation in the Eurosystem auctions and money market integration," Temi di discussione (Economic working papers) 562, Bank of Italy, Economic Research and International Relations Area.

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