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Interest rate determination in the interbank market

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  • Vítor Gaspar

    ()
    (European Central Bank)

  • Gabriel Pérez-Quirós

    ()
    (Banco de España)

  • Hugo Rodríguez Mendizábal

    ()
    (Universitat Autònoma de Barcelona)

Abstract

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/04/Fic/dt0407e.pdf
File Function: First version, March 2004
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0407.

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Length: 39 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:bde:wpaper:0407

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  1. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York.
  2. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
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  19. Roberds, William & Runkle, David & Whiteman, Charles H, 1996. "A Daily View of Yield Spreads and Short-Term Interest Rate Movements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 34-53, February.
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Cited by:
  1. Adela Luque, 2005. "Skill mix and technology in Spain: evidence from firm level data," Banco de Espa�a Working Papers 0513, Banco de Espa�a.
  2. Alejandra Anastasi & Pedro Elosegui & Máximo Sangiácomo, 2010. "Call Money Interest Rate Determinants in Argentina," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(57-58), pages 95-126, January -.
  3. Jérôme Vandenbussche & Stanley Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets," IMF Working Papers 09/228, International Monetary Fund.
  4. Aleksander Berentsen & Cyril Monnet, 2007. "Monetary Policy in a Channel System," CESifo Working Paper Series 1929, CESifo Group Munich.
  5. Gabbi, G. & Germano, G. & Hatzopoulos, V. & Iori, G. & Politi, M., 2012. "Market microstructure, bank's behaviour and interbank spreads," Working Papers 12/06, Department of Economics, City University London.
  6. 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.
  7. Avadanei Andreea, . "The Implications Of Economic And Monetary Union In Sustaining European Money Market Integration," Description: Managerial Challenges of the Contemporary Society 1, Faculty of Economics and Business Administration, Babes-Bolyai University.
  8. Kempa , Michal, 2006. "Money market volatility, A simulation study," Research Discussion Papers 13/2006, Bank of Finland.
  9. 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.
  10. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics.
  11. Ronald Heijmans & Lola Hern�ndez & Richard Heuver, 2013. "Determinants of the rate of the Dutch unsecured overnight money market," DNB Working Papers 374, Netherlands Central Bank, Research Department.
  12. Marius Jurgilas, 2005. "Interbank market under the currency board: Case of Lithuania," Computing in Economics and Finance 2005 448, Society for Computational Economics.
  13. Kempa, Michal, 2007. "What determines commercial banks’ demand for reserves in the interbank market," Research Discussion Papers 30/2007, Bank of Finland.
  14. 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.
  15. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 0393, European Central Bank.
  16. Karel BRŮNA, 2010. "Monetary Policy Implementation and Liquidity Management of the Czech Banking System," European Financial and Accounting Journal, University of Economics, Prague, vol. 2010(3), pages 15-41.

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