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The liquidity management of the Eurosystem during the period of financial turmoil

Author

Listed:
  • Luc Aucremanne

    (National Bank of Belgium, Research Department)

  • Jef Boeckx

    (National Bank of Belgium, Research Department)

  • Olivier Vergote

    (National Bank of Belgium, Research Department)

Abstract

In the past few months, euro area money markets have been exposed to intense tensions. On 8 August, overnight interest rates rose to very high levels which required interventions of the Eurosystem in order to stabilise short-term money market interest rates around the target level, i.e. the minimum bid rate on the main refinancing operations. The article explains how the Eurosystem steers very short-term money market interest rates by adjusting its supply of liquidity on the money market. It is shown how the Eurosystem’s liquidity management stabilised short-term money market interest rates around the minimum bid rate on the main refinancing operations in the first half of 2007. Although short-term money market interest rates were more volatile during the period of financial turmoil, the Eurosystem nevertheless managed to safeguard the signalling function of the short-term money market interest rates by applying its operational framework in a flexible way. More specifically, the Eurosystem decided to allot more liquidity than the benchmark amount in the main refinancing operations early within the maintenance period. It was also decided to conduct fine-tuning operations on a more frequent basis in order to stabilise short-term rates. Finally, the Eurosystem also decided to increase the share of longer-term refinancing operations in the total amount of outstanding open market operations. Despite the relative success in stabilising very short-term money market interest rates, longer maturity unsecured interest rates – for instance the 3-month Euribor – increased significantly during the period of financial turmoil. These movements cannot be controlled directly by central banks as they are determined predominantly by private sector behaviour. However, when assessing the appropriate monetary policy stance, the Governing Council of the ECB takes these possibly changing financing conditions into account.

Suggested Citation

  • Luc Aucremanne & Jef Boeckx & Olivier Vergote, 2007. "The liquidity management of the Eurosystem during the period of financial turmoil," Economic Review, National Bank of Belgium, issue iii, pages 27-41, December.
  • Handle: RePEc:nbb:ecrart:y:2007:m:december:i:iii:p:27-41
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    File URL: https://www.nbb.be/doc/oc/repec/ecrart/ecoreviii2007_h3.pdf
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    References listed on IDEAS

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    1. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Cited by:

    1. Acharya, Viral V. & Imbierowicz, Björn & Steffen, Sascha & Teichmann, Daniel, 2015. "Does Lack of Financial Stability Impair the Transmission of Monetary Policy?," HIT-REFINED Working Paper Series 24, Institute of Economic Research, Hitotsubashi University.
    2. M. Kasongo Kashama, 2014. "The how and why of a negative rate for the deposit facility," Economic Review, National Bank of Belgium, issue ii, pages 102-111, September.
    3. J. Boeckx & Ide,S., 2012. "What can we and can't we infer from the recourse to the deposit facility?," Economic Review, National Bank of Belgium, issue i, pages 31-37, June.
    4. L. Aucremanne & J. Boeckx & D. Dury & S. Ide, 2008. "Ten years of monetary union in retrospect," Economic Review, National Bank of Belgium, issue iv, pages 21-44, December.
    5. N. Cordemans & M. de Sola Perea, 2011. "Central bank rates, market rates and retail bank rates in the euro area in the context of the recent crisis," Economic Review, National Bank of Belgium, issue i, pages 27-52, June.
    6. Luc Aucremanne & Jef Boeckx & Olivier Vergote, 2007. "Interest rate policy or monetary base policy : implications for a central bank’s balance sheet," Economic Review, National Bank of Belgium, issue iii, pages 17-26, December.

    More about this item

    Keywords

    monetary policy implementation; Eurosystem; open market operations;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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