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Interest rate determination in the interbank market

  • Vítor Gaspar

    ()

    (European Central Bank)

  • Gabriel Pérez-Quirós

    ()

    (Banco de España)

  • Hugo Rodríguez Mendizábal

    ()

    (Universitat Autònoma de Barcelona)

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/04/Fic/dt0407e.pdf
File Function: First version, March 2004
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0407.

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Length: 39 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:bde:wpaper:0407
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  16. Würtz, Flemming Reinhardt, 2003. "A comprehensive model on the euro overnight rate," Working Paper Series 0207, European Central Bank.
  17. Furfine, Craig H., 2000. "Interbank payments and the daily federal funds rate," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 535-553, October.
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