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The daily market for funds in Europe: Has something changed with the EMU?

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  • Pérez Quirós, Gabriel
  • Rodríguez Mendizábal, Hugo

Abstract

This paper presents evidence that the existence of deposit and lending facilities combined with an averaging provision for the reserve requirement are powerful tools to stabilize the overnight rate. We reach this conclusion by comparing the behavior of this rate in Germany before and after the beginning of the EMU. The analysis of the German experience is useful because it allows us to isolate specifically the effect on the overnight rate of these particular instruments of monetary policy. To show that this outcome is general and not a particular result for the German market, we develop a theoretical model of reserve management which is able to reproduce our empirical findings. JEL Classification: E44, E52

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0067.

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Date of creation: Jun 2001
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Handle: RePEc:ecb:ecbwps:20010067

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Related research

Keywords: martingale hypothesis; overnight rates; reserve demand;

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  1. John Y. Campbell, 1987. "Money Announcements, the Demand for Bank Reserves and the Behavior of the Federal Funds Rate Within the Statement Week," NBER Working Papers 1806, National Bureau of Economic Research, Inc.
  2. Leonardo Bartolini & Giuseppe Bertoli & Alessandro Prati, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," Econometric Society World Congress 2000 Contributed Papers 0123, Econometric Society.
  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. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  5. Spindt, Paul A. & Hoffmeister, J. Ronald, 1988. "The Micromechanics of the Federal Funds Market: Implications for Day-of-the-Week Effects in Funds Rate Variability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(04), pages 401-416, December.
  6. Gabriel Pérez & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Mathematical appendix," Economics Working Papers 496, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
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