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Estimating the demand for settlement balances in the Canadian Large Value Transfer System: How much is too much?

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  • Nellie (Yinan) Zhang

Abstract

This paper applies a static model of an interest rate corridor to the Canadian data and estimates the aggregate demand for central bank settlement balances in the Large Value Transfer System (LVTS). The analysis takes into account the downward divergence of the overnight interest rate from the target rate, which has been persistent since 2005. The results suggest that a target of $3,000,000,000 for LVTS settlement balances does not seem excessive during the time period when Canadian monetary policy was operating at the effective lower bound (ELB). In addition, the estimation shows that the point elasticity of overnight interest rate is around 0.17 in the ELB framework. Évaluation de la demande de soldes de règlement au sein du système de transfert de paiements de grande valeur canadien : est‐elle excessive ? L’auteure applique aux données canadiennes un modèle statique formalisant un corridor de taux d’intérêt en vue d’estimer la demande totale de soldes de. L’analyse tient compte de la divergence à la baisse du taux du financement à un jour qu’on observe depuis 2005 par rapport au taux visé. D’après les résultats obtenus, un niveau cible de 3 milliards de dollars pour les soldes de règlement durant la période où le taux directeur au Canada se situait à sa valeur plancher ne paraît pas excessif. L’estimation montre en outre que l’élasticité du taux à un jour s’établit à environ 0,17 quand le taux directeur se trouve à sa valeur plancher.

Suggested Citation

  • Nellie (Yinan) Zhang, 2019. "Estimating the demand for settlement balances in the Canadian Large Value Transfer System: How much is too much?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(2), pages 735-762, May.
    • Handle: RePEc:wly:canjec:v:52:y:2019:i:2:p:735-762
    DOI: 10.1111/caje.12380
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    References listed on IDEAS

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