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Steering interest rates amidst large structural surplus liquidity: a tale of three central banks

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Listed:
  • Janak Raj

    (Reserve Bank of India)

  • Joice John

    (Reserve Bank of India)

Abstract

This paper focuses on as to how three central banks, viz. the United States Federal Reserve (US Fed), the European Central Bank (ECB) and the Reserve Bank of India (RBI), steered interest rates in the face of large surplus liquidity. This study finds that it is challenging to steer the interest rate in the middle of the corridor when there is large surplus liquidity. However, the floor of the policy corridor (the ECB and the RBI) and the interest rates on excess reserves (the US Fed) prevented overnight interest rates from collapsing. As such, the relationship between interest rates and surplus liquidity was found to be non-linear, i.e. beyond a certain threshold, surplus liquidity had no material additional impact on interest rates.

Suggested Citation

  • Janak Raj & Joice John, 2020. "Steering interest rates amidst large structural surplus liquidity: a tale of three central banks," Indian Economic Review, Springer, vol. 55(1), pages 93-116, June.
    • Handle: RePEc:spr:inecre:v:55:y:2020:i:1:d:10.1007_s41775-020-00084-4
    DOI: 10.1007/s41775-020-00084-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Steering of interest rates; Structural surplus liquidity; Liquidity management;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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