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Liquidity, information, and the overnight rate Author info | Abstract | Publisher info | Download info | Related research | Statistics Christian Ewerhart () (Institute for Empirical Research in Economics (IEW) )
Nuno Cassola () (European Central Bank, DG Market Operations )
Steen Ejerskov (Danmarks Nationalbank, Economics )
Natacha Valla () (Banque de France (Bank of France) )
Additional information is available for the following
registered author(s):
We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generate an overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.
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Paper provided by European Central Bank in its series Working Paper Series with number
378.
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Length: 36 pages
Date of creation: Jul 2004Date of revision:
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Keywords: Liquidity effect asymmetric information monetary policy implementation. Other versions of this item:
Find related papers by JEL classification: G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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