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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.

Suggested Citation

  • Vítor Gaspar & Gabriel Pérez-Quirós & Hugo Rodríguez Mendizábal, 2004. "Interest rate determination in the interbank market," Working Papers 0407, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0407

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    References listed on IDEAS

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    Cited by:

    1. Markus Engler & Vahidin Jeleskovic, 2016. "Intraday volatility, trading volume and trading intensity in the interbank market e-MID," MAGKS Papers on Economics 201648, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Kempa, Michal, 2007. "What determines commercial banks' demand for reserves in the interbank market?," Research Discussion Papers 30/2007, Bank of Finland.
    3. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank.
    4. Jérôme Vandenbussche & Stanley B Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets; The Case of Jordan," IMF Working Papers 09/228, International Monetary Fund.
    5. Caroline Jardet & Gaelle Le Fol, 2010. "Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 316-330.
    6. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
    7. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Norwegian School of Economics, Department of Business and Management Science.
    8. Kempa, Michal, 2006. "Money market volatility : a simulation study," Research Discussion Papers 13/2006, Bank of Finland.
    9. Dieter Nautz & Christian J. Offermanns, 2007. "The dynamic relationship between the euro overnight rate, the ECB's policy rate and the term spread," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(3), pages 287-300.
    10. Alessandro Marchesiani & Aleksander Berentsen, 2010. "Standing Facilities Versus Open Market Operations: Equivalence Results," 2010 Meeting Papers 929, Society for Economic Dynamics.
    11. Marius Jurgilas, 2005. "Interbank market under the currency board: Case of Lithuania," Computing in Economics and Finance 2005 448, Society for Computational Economics.
    12. Gabbi, G. & Germano, G. & Hatzopoulos, V. & Iori, G. & Politi, M., 2012. "Market microstructure, bank's behaviour and interbank spreads," Working Papers 12/06, Department of Economics, City University London.
    13. Sunil Kumar & Anand Prakash & Krishna M. Kushawaha, 2017. "What Explains Call Money Rate Spread in India?," Working Papers id:11975, eSocialSciences.
    14. Ronald Heijmans & Lola Hernández & Richard Heuver, 2013. "Determinants of the rate of the Dutch unsecured overnight money market," DNB Working Papers 374, Netherlands Central Bank, Research Department.
    15. Karel BRŮNA, 2010. "Monetary Policy Implementation and Liquidity Management of the Czech Banking System," European Financial and Accounting Journal, University of Economics, Prague, vol. 2010(3), pages 15-41.
    16. Adela Luque, 2005. "Skill mix and technology in Spain: evidence from firm level data," Working Papers 0513, Banco de España;Working Papers Homepage.
    17. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics.
    18. Avadanei Andreea, "undated". "The Implications Of Economic And Monetary Union In Sustaining European Money Market Integration," Description: Managerial Challenges of the Contemporary Society 1, Faculty of Economics and Business Administration, Babes-Bolyai University.
    19. Alejandra Anastasi & Pedro Elosegui & Máximo Sangiácomo, 2010. "Call Money Interest Rate Determinants in Argentina," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(57-58), pages 95-126, January -.

    More about this item

    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


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