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Money market volatility, A simulation study

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  • Kempa , Michal

    ()
    (RUESG, University of Helsinki and Bank of Finland)

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    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.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0613netti.pdf
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    Bibliographic 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.suomenpankki.fi/en/
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    Related research

    Keywords: Interbank market; interest rate volatility; central bank procedures; open market operations;

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    References

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    1. 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.
    2. Vitor Gaspar & Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2004. "Interest Rate Determination in the Interbank Market," UFAE and IAE Working Papers 603.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    3. Alessandro Prati & Giuseppe Bertola & Leonardo Bartolini, 2000. "Day-To-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," IMF Working Papers 00/206, International Monetary Fund.
    4. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2001. "Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1287-1317, July.
    5. 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.
    6. Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2003. "The daily market for funds in Europe: what has changed with the EMU," Banco de Espa�a Working Papers 0313, Banco de Espa�a.
    7. 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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