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Money market volatility, A simulation study

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Author Info
Kempa , Michal () (RUESG, University of Helsinki and Bank of Finland)
Abstract

This paper analyses different operational central bank policies and their impact on the behaviour of the money market interest rate. The model combines profit maximising behaviour by commercial banks with the central bank supplying the liquidity that keeps the market rate on target. It seems that frequent liquid-ity supplying operations represent an efficient tool to control money market rates. An averaging provision reduces the use of standing facilities and interest rates volatility in all days except for the last day of the maintenance period. Whenever banks have different maintenance horizons both the spikes in volatility and use of standing facilities disappear. The paper also compares two different liquidity supply policies and finds that the level of liquidity necessary to keep the rates on target depends on not only the aggregate but also assets values of individual banks.

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File URL: http://www.bof.fi/NR/rdonlyres/73506D4E-D9D4-48AB-8536-5C5A86B582D3/0/0613netti.pdf
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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 13/2006.

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Length: 39 pages
Date of creation: 12 Jun 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_013

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: Interbank market; interest rate volatility; central bank procedures; open market operations;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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  1. Vítor Gaspar & Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2004. "Interest rate determination in the interbank market," Working Paper Series 351, European Central Bank. [Downloadable!]
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  2. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York. [Downloadable!]
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  3. 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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  4. Leonardo Bartolini & Alessandro Prati, 2003. "Cross-country differences in monetary policy execution and money market rates' volatility," Staff Reports 175, Federal Reserve Bank of New York. [Downloadable!]
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  5. Julius Moschitz, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank. [Downloadable!]
  6. Quiros, Gabriel Perez & Mendizabal, Hugo Rodriguez, 2006. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 91-118, February. [Downloadable!] (restricted)
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  7. Leonardo Bartolini & Giuseppe Bertoli & Alessandro Prati, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," Econometric Society World Congress 2000 Contributed Papers 0123, Econometric Society. [Downloadable!]
    Other versions:
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