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Central bank forecasts of liquidity factors and the control of short term interest rates

Author

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  • Ulrich Bindseil

    () (European Central Bank, DG-Operations, Operations Analysis Division, Frankfurt a.M. (Germany))

Abstract

A simple model of the interaction between central bank liquidity management and the inter-bank overnight rate is suggested, which allows analysing the publication offorecasts of liquidity factors by the European Central Bank adopted in June 2000. The paper argues that the main practical advantage of the publication of theseforecasts is that it makes the signal extraction problem with regard to the centralbank's intentions trivial and hence allows establishing a superior behavioural equilibrium between the central bank and the money market participants. In this equilibrium, the central bank can achieve a better steering of overnight rates than under private autonomous factor forecasts, depending of course also on the quality of liquidity forecasts. It is furthermore shown that the publication of an average of autonomous factors, such as adopted by the ECB, is, at least within the model presented, superior to the separate publication of autonomous factors for each single day.

Suggested Citation

  • Ulrich Bindseil, 2002. "Central bank forecasts of liquidity factors and the control of short term interest rates," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 55(220), pages 13-37.
  • Handle: RePEc:psl:bnlqrr:2002:12
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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9902/9784
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    References listed on IDEAS

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    1. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
    2. 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.
    3. anonymous, 1987. "Review of monetary policy and conditions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 50, march.
    4. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-159, February.
    5. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
    6. Ignazio Angeloni & Alessandro Prati, 1996. "The identification of liquidity effects in the EMS: Italy 1991–1992," Open Economies Review, Springer, vol. 7(3), pages 275-293, July.
    7. anonymous, 1987. "Review of monetary conditions and policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 50, june.
    8. Nautz, Dieter, 1997. "How Auctions Reveal Information: A Case Study on German REPO Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 17-25, February.
    9. Bindseil Ulrich, 2000. "Central Bank Liquidity Management and the Signal Extraction Problem on the Money Market / Die Liquiditätssteuerung der Notenbank und das Signal-extraktionsproblem am Geldmarkt," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 220(3), pages 284-301, June.
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    Cited by:

    1. Morgunov, V.I., 2016. "The Liquidity Management of the Banking Sector and the Short-Term Money Market Interest Rates," Working Papers 21311, Russian Presidential Academy of National Economy and Public Administration.
    2. Kiyutsevskaya, Anna & Trunin, Pavel, 2018. "Features of Interest Rate Policy Under the Inflation Targeting Regime," Working Papers 031812, Russian Presidential Academy of National Economy and Public Administration.

    More about this item

    Keywords

    Interest Rates; Interest;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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