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Interest rate determination in the interbank market

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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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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 351.

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Length: 48 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040351

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Keywords: Overnight interest rate; Monetary policy instruments; Eonia panel.;

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References

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Citations

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Cited by:
  1. Jardet, Caroline & Le Fol, Gaëlle, 2010. "Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/5391, Université Paris-Dauphine.
  2. Jérôme Vandenbussche & Stanley Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets: The Case of Jordan," IMF Working Papers 09/228, International Monetary Fund.
  3. Aleksander Berentsen & Cyril Monnet, 2008. "Monetary policy in a channel system," Working Papers 08-7, Federal Reserve Bank of Philadelphia.
  4. Kempa , Michal, 2006. "Money market volatility, A simulation study," Research Discussion Papers 13/2006, Bank of Finland.
  5. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Department of Finance and Management Science, Norwegian School of Economics.
  6. 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.
  7. Marius Jurgilas, 2005. "Interbank market under the currency board: Case of Lithuania," Computing in Economics and Finance 2005 448, Society for Computational Economics.
  8. Kempa, Michal, 2007. "What determines commercial banks’ demand for reserves in the interbank market," Research Discussion Papers 30/2007, Bank of Finland.
  9. Ronald Heijmans & Lola Hernández & Richard Heuver, 2013. "Determinants of the rate of the Dutch unsecured overnight money market," DNB Working Papers 374, Netherlands Central Bank, Research Department.
  10. Adela Luque, 2005. "Skill mix and technology in Spain: evidence from firm level data," Banco de España Working Papers 0513, Banco de España.
  11. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics.
  12. 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.
  13. 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 -.

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