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A comprehensive model on the euro overnight rate

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  • Würtz, Flemming Reinhardt
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    Abstract

    This paper presents a comprehensive model on the spread between the euro overnight rate and the key policy rate of the ECB. It is shown that the most important variables driving the level and the volatility of this spread are expectations about changes of the key policy rate and the projected liquidity conditions at the end of the reserve maintenance period. The model allows for an assessment of how these variables impact differently on the spread according to the different open market operating procedures and the liquidity management policy of the ECB. It is found that a fixed rate tender procedure effectively limits the downward potential of the spread, while, however, no evidence is identified that it should be more effective than a variable rate tender procedure in keeping overall the overnight rate close to the key policy rate. JEL Classification: C32, E43, E52

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0207.

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    Date of creation: Jan 2003
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    Handle: RePEc:ecb:ecbwps:20030207

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    1. Gaspar, Vitor & Perez-Quiros, Gabriel & Sicilia, Jorge, 2001. "The ECB Monetary Policy Strategy and the Money Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 325-42, October.
    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. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The Microstructure of the Euro Money Market," CEPR Discussion Papers 3081, C.E.P.R. Discussion Papers.
    4. Juan Ayuso & Rafael Repullo, 2001. "Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Central Bank," Banco de Espa�a Working Papers 0105, Banco de Espa�a.
    5. 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.
    6. Bindseil, Ulrich, 2002. "Equilibrium bidding in the Eurosystem's open market operations," Working Paper Series 0137, European Central Bank.
    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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    Cited by:
    1. Gaspar, Vítor & Pérez-Quirós, Gabriel & Rodriguez, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers.
    2. Leonardo Bartolini & Alessandro Prati, 2003. "The execution of monetary policy: a tale of two central banks," Staff Reports 165, Federal Reserve Bank of New York.

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