Liquidity Effects and the Determinants of Short-term Interest Rates in Italy (1991-92)
AbstractThe paper uses Italian daily data from January 1991 to July 1992 (a period in which the lira belonged to the narrow EMS band without foreign exchange controls) to measure the relationship between liquidity and interest rates. The high quality of the data allows us to separate that part of interest rate variability due to foreign exchange factors (i.e. interest rate linkages in the EMS) from that attributable to other (`domestic') factors. We compare and evaluate alternative indicators of daily liquidity in a system of monthly average computation of reserve requirements. We find clear evidence of the existence of liquidity effects on interest rates and, in contrast to the pre-1990 period, find that foreign exchange factors have had a dominant influence, directly or through their effect on domestic liquidity, on interest rate variability.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 788.
Date of creation: May 1993
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Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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- Alessandro Prati & Giuseppe Bertola & Leonardo Bartolini, 2000.
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- 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.
- J T Kneeshaw, 1995. "A survey of non-financial sector balance sheets in industialised countries: implications for the monetary policy transmission mechanism," BIS Working Papers 25, Bank for International Settlements.
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