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The Daily Market for Funds in Europe: What Has Changed with the EMU?

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  • Quiros, Gabriel Perez
  • Mendizabal, Hugo Rodriguez

Abstract

This paper shows that the existence of deposit and lending facilities combined with an averaging provision for the reserve requirement are powerful tools to stabilize the overnight rate. We reach this conclusion by comparing the behavior of this rate in Germany before and after the start of the EMU. The analysis of the German experience allows us to isolate the effects on the overnight rate of these particular instruments of monetary policy. To illustrate that this outcome is a general conclusion and not a particular result of the German market, we develop a theoretical model of reserve management, which is able to reproduce our empirical findings.

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  • 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.
    • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:91-118
    DOI: 10.1353/mcb.2006.0023
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    1. Spindt, Paul A. & Hoffmeister, J. Ronald, 1988. "The Micromechanics of the Federal Funds Market: Implications for Day-of-the-Week Effects in Funds Rate Variability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(4), pages 401-416, December.
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    5. Gaspar, Vitor & Perez-Quiros, Gabriel & Sicilia, Jorge, 2001. "The ECB Monetary Policy Strategy and the Money Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 325-342, October.
    6. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
    7. 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.
    8. Escriva, J.L. & Fagan, F.P., 1996. "Empirical assessment of Monetary Policy Instruments and Procedures (MPIP) in EU Countries," Papers 2, European Monetary Institute.
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    10. Würtz, Flemming Reinhardt, 2003. "A comprehensive model on the euro overnight rate," Working Paper Series 207, European Central Bank.
    11. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 44, European Central Bank.
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    JEL classification:

    • 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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