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Monetary Policy Implementation and Overnight Rate Persistence

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  • Dieter Nautz
  • Jan Scheithauer

Abstract

Overnight money market rates are the predominant operational target of monetary policy. As a consequence, central banks have re- designed the implementation of monetary policy to keep the deviations of the overnight rate from the key policy rate small and short-lived. This paper uses fractional integration techniques to explore how the operational framework of four major central banks affects the persis- tence of overnight rates. Our results suggest that a well-communicated and transparent interest rate target of the central bank is a particu- larly important condition for a low degree of overnight rate persistence.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-053.

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Length: 26 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2009-053

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Keywords: Controllability and Persistence of Interest Rates; Oper- ational Framework of Central Banks; Long Memory and Fractional Integration;

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References

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  1. Abbassi, Puriya & Nautz, Dieter, 2010. "Monetary transmission right from the start: The (dis)connection netween the money market and the ECB's main refinancing rates," Discussion Papers 2010/7, Free University Berlin, School of Business & Economics.
  2. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2004. "Non-Linearities And Fractional Integration In The Us Unemployment Rate," Public Policy Discussion Papers 04-17, Economics and Finance Section, School of Social Sciences, Brunel University.
  3. Gabriel Pérez-Quirós & Hugo Rodríguez Mendizábal, 2003. "The Daily Market for Funds in Europe: What has Changed with the EMU?," Working Papers 22, Barcelona Graduate School of Economics.
  4. Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission," Temi di discussione (Economic working papers) 710, Bank of Italy, Economic Research and International Relations Area.
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  11. Thomas J. Jordan & Peter Kugler, 2004. "Implementing Swiss Monetary Policy: Steering the 3M-Libor with Repo Transactions," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 381-393, September.
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  14. Haldrup, Niels & Nielsen, Morten Orregaard, 2007. "Estimation of fractional integration in the presence of data noise," Computational Statistics & Data Analysis, Elsevier, vol. 51(6), pages 3100-3114, March.
  15. Nautz, Dieter & Offermanns, Christian J., 2008. "Volatility transmission in the European money market," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 23-39, March.
  16. Michael Ehrmann & Marcel Fratzscher, 2007. "Transparency, Disclosure, and the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 179-225, March.
  17. Hassler, Uwe & Nautz, Dieter, 2008. "On the persistence of the Eonia spread," Economics Letters, Elsevier, vol. 101(3), pages 184-187, December.
  18. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, Transparency and the Improved Operational Framework: A Look at Overnight Volatility Transmission," International Finance, Wiley Blackwell, vol. 12(2), pages 151-170, 08.
  19. Cheung, Yin-Wong & Lai, Kon S., 2001. "Long memory and nonlinear mean reversion in Japanese yen-based real exchange rates," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 115-132, February.
  20. 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.
  21. Anne Vila Wetherilt, 2003. "Money market operations and short-term interest rate volatility in the United Kingdom," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 701-719.
  22. Cassola, Nuno & Morana, Claudio, 2008. "Modelling short-term interest rate spreads in the euro money market," Working Paper Series 0982, European Central Bank.
  23. Whitesell, William, 2006. "Interest rate corridors and reserves," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1177-1195, September.
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Cited by:
  1. Cassola, Nuno & Morana, Claudio, 2008. "Modelling short-term interest rate spreads in the euro money market," Working Paper Series 0982, European Central Bank.
  2. Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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