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The execution of monetary policy: a tale of two central banks

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Author Info
Leonardo Bartolini
Alessandro Prati

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Abstract

The Eurosystem and the U.S. Federal Reserve System follow quite different approaches to the execution of monetary policy. The former institution adopts a "hands-off" approach that largely delegates to depository institutions the task of stabilizing their own liquidity at high frequency. The latter institution follows a much more "hands-on" approach involving daily intervention to fine-tune the liquidity of the banking system. We review the implications of these contrasting approaches, focusing on their impact on the high-frequency behavior of very short-term interest rates. We also examine interest rate behavior following the Y2K date change and the 9/11/2001 crisis - events that required the two central banks to deviate significantly from their customary style of liquidity management. We find that, despite differences in operational framework, certain elements of the institutions' styles of day-to-day intervention have caused very short-term interest rates to behave similarly in the euro area and the United States. Significantly, during periods of anticipated or actual crisis, the two institutions have acted very much alike in managing the liquidity of the interbank market in response to shocks.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 165.

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Date of creation: 2003
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Handle: RePEc:fip:fednsr:165

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Keywords: Monetary policy European Monetary System (Organization) Federal Reserve System Interest rates

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  6. 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. [Downloadable!] (restricted)
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  7. Vitor Gaspar & Jorge Sicilia & Gabriel Perez-Quiros, 2001. "The ECB monetary policy strategy and the money market," Working Paper Series 069, European Central Bank. [Downloadable!]
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  8. Livio Stracca & Clara Martin Moss & Livio Stracca, 2004. "Demand and supply in the ECB's main refinancing operations," Money Macro and Finance (MMF) Research Group Conference 2003 94, Money Macro and Finance Research Group. [Downloadable!]
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  12. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The Daily Market for Funds in Europe: Has Something Changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  13. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
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  16. Paul Bennett & Spence Hilton, 1997. "Falling reserve balances and the federal funds rate," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue May. [Downloadable!]
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  19. Prati, Alessandro & Bartolini, Leonardo & Bertola, Giuseppe, 2003. "The overnight interbank market: Evidence from the G-7 and the Euro zone," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 2045-2083, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ulrike Neyer & Jürgen Wiemers, 2004. "The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 127(III), pages 395-428, September. [Downloadable!]
  2. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2003. "The lender of last resort - a 21st century approach," Working Paper Series 298, European Central Bank. [Downloadable!]
    Other versions:
  3. Chiara Scotti, 2006. "A bivariate model of Fed and ECB main policy rates," International Finance Discussion Papers 875, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Nuno Cassola & Claudio Morana, 2006. "Comovements in volatility in the euro money market," Working Paper Series 703, European Central Bank. [Downloadable!]
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