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Central bank forecasts of liquidity factors and the control of short term interest rates

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  • Ulrich Bindseil

    ()
    (European Central Bank, DG-Operations, Operations Analysis Division, Frankfurt a.M. (Germany))

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    Abstract

    A simple model of the interaction between central bank liquidity management and the inter-bank overnight rate is suggested, which allows analysing the publication offorecasts of liquidity factors by the European Central Bank adopted in June 2000. The paper argues that the main practical advantage of the publication of theseforecasts is that it makes the signal extraction problem with regard to the centralbank's intentions trivial and hence allows establishing a superior behavioural equilibrium between the central bank and the money market participants. In this equilibrium, the central bank can achieve a better steering of overnight rates than under private autonomous factor forecasts, depending of course also on the quality of liquidity forecasts. It is furthermore shown that the publication of an average of autonomous factors, such as adopted by the ECB, is, at least within the model presented, superior to the separate publication of autonomous factors for each single day.

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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9902/9784
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    Bibliographic Info

    Article provided by Banca Nazionale del Lavoro in its journal Banca Nazionale del Lavoro Quarterly Review.

    Volume (Year): 55 (2002)
    Issue (Month): 220 ()
    Pages: 13-37

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    Handle: RePEc:psl:bnlqrr:2002:12

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    Related research

    Keywords: Interest Rates; Interest;

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    1. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
    2. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
    3. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
    4. Ulrich Bindseil, 2000. "Central Bank Liquidity Management and the Signal Extraction Problem on the Money Market," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 220(3), pages 284-301.
    5. Ignazio Angeloni & Alessandro Prati, 1996. "The identification of liquidity effects in the EMS: Italy 1991–1992," Open Economies Review, Springer, vol. 7(3), pages 275-293, July.
    6. anonymous, 1987. "Review of monetary policy and conditions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 50, march.
    7. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Nautz, Dieter, 1997. "How Auctions Reveal Information: A Case Study on German REPO Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 17-25, February.
    9. anonymous, 1987. "Review of monetary conditions and policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 50, june.
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