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The determinants of the overnight interest rate in the euro area

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  • Moschitz, Julius

Abstract

The overnight interest rate is the price paid for one day loans and defines the short end of the yield curve. It is the equilibrium outcome of supply and demand for bank reserves. This paper models the intertemporal decision problems in the reserve market for both central and commercial banks. All important institutional features of the euro area reserve market are included. The model is then estimated with euro area data. A permanent change in reserve supply of one billion euro moves the overnight rate by eight basis points into the opposite direction, hence, there is a substantial liquidity effect. Most of the predictable patterns for the mean and the volatility of the overnight rate are related to monetary policy implementation, but also some calendar day effects are present. Banks react sluggishly to new information. Implications for market efficiency, endogeneity of reserve supply and underbidding are studied. JEL Classification: E52, E58, E43

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0393.

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Date of creation: Sep 2004
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Handle: RePEc:ecb:ecbwps:20040393

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Keywords: central bank operating procedures; EONIA rate; liquidity effect; money markets;

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References

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Cited by:
  1. Nathan Porter & TengTeng Xu, 2013. "Money Market Rates and Retail Interest Regulation in China: The Disconnect between Interbank and Retail Credit Conditions," Working Papers 13-20, Bank of Canada.
  2. Ángel León & Francis Benito & Juan Nave, 2006. "Modeling The Euro Overnight Rate," Working Papers. Serie AD 2006-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Benito, Francis & Leon, Angel & Nave, Juan, 2007. "Modeling the Euro overnight rate," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 756-782, December.
  4. Camilo González & Luisa F. Silva & Carmiña O. Vargas & Andrés M. Velasco, 2013. "An exploration on interbank markets and the operational framework of monetary policy in Colombia," BORRADORES DE ECONOMIA 010982, BANCO DE LA REPÚBLICA.
  5. International Monetary Fund, 2009. "What Drives China's Interbank Market?," IMF Working Papers 09/189, International Monetary Fund.
  6. Colarossi, Silvio & Zaghini, Andrea, 2007. "Gradualism, transparency and improved operational framework: A look at the overnight volatility transmission," CFS Working Paper Series 2007/16, Center for Financial Studies (CFS).
  7. Camilo GOnzález & Luisa Silva & Carmiña Vargas & Andrés Velasco, 2013. "Uncertainty in the Money supply mechanism and interbank markets in Colombia," Borradores de Economia 790, Banco de la Republica de Colombia.
  8. Linzert, Tobias & Schmidt, Sandra, 2007. "What Explains the Spread Between the Euro Overnight Rate and the ECB's Policy Rate?," ZEW Discussion Papers 07-076, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Välimäki , Tuomas, 2006. "Why the marginal MRO rate exceeds the ECB policy rate?," Research Discussion Papers 20/2006, Bank of Finland.
  10. Egorov, Alexey & Kovalenko , Olga, 2013. "Structural features and interest-rate dynamics of Russia’s interbank lending market," BOFIT Discussion Papers 23/2013, Bank of Finland, Institute for Economies in Transition.
  11. Nadja Kamhi, 2006. "LVTS, the Overnight Market, and Monetary Policy," Working Papers 06-15, Bank of Canada.
  12. Marius Jurgilas, 2005. "Interbank market under the currency board: Case of Lithuania," Computing in Economics and Finance 2005 448, Society for Computational Economics.
  13. Beirne, John, 2012. "The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 534-551.
  14. Kempa , Michal, 2006. "Money market volatility, A simulation study," Research Discussion Papers 13/2006, Bank of Finland.
  15. Kempa, Michal, 2007. "What determines commercial banks’ demand for reserves in the interbank market," Research Discussion Papers 30/2007, Bank of Finland.
  16. Jérôme Vandenbussche & Stanley Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets," IMF Working Papers 09/228, International Monetary Fund.

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