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Interest rate determination in the interbank market

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  • Gaspar, Vítor
  • Pérez Quirós, Gabriel
  • Rodríguez Mendizábal, Hugo

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. JEL Classification: E52, E58

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0351.

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Date of creation: Apr 2004
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Handle: RePEc:ecb:ecbwps:20040351

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Keywords: Eonia panel; monetary policy instruments; Overnight interest rate;

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  1. 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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Cited by:
  1. Kempa, Michal, 2007. "What determines commercial banks’ demand for reserves in the interbank market," Research Discussion Papers 30/2007, Bank of Finland.
  2. 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.
  3. 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.
  4. 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.
  5. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics.
  6. 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.
  7. Jardet, Caroline & Le Fol, Gaëlle, 2010. "Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework," Economics Papers from University Paris Dauphine 123456789/5391, Paris Dauphine University.
  8. 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.
  9. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
  10. 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.
  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. 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 -.
  13. Marius Jurgilas, 2005. "Interbank market under the currency board: Case of Lithuania," Computing in Economics and Finance 2005 448, Society for Computational Economics.
  14. Kempa , Michal, 2006. "Money market volatility, A simulation study," Research Discussion Papers 13/2006, Bank of Finland.
  15. Jérôme Vandenbussche & Stanley Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets," IMF Working Papers 09/228, International Monetary Fund.
  16. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 0393, European Central Bank.

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