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Liquidity and Announcement Effects in the Euro Area

Author

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  • Paolo Angelini

    () (Bank of Italy, Economic Research Department)

Abstract

The paper analyzes the euro-area interbank market. The martingale hypothesis for the Eonia, the reference overnight interest rate, is tested and rejected. Such rejection is a sufficient condition for a liquidity effect, which is then estimated. The magnitude of the effect is found to depend on the perceived degree of persistence of the liquidity shock. At the beginning of the reserve maintenance period a liquidity drain amounting to 3 per cent of required reserves raises the Eonia by 4 basis points, by 13-15 points, by 25 points or more (up to the limits of the official rate corridor, i.e. roughly � 100 basis points), depending on whether it is expected to be purely temporary, to last at least through the following day or through the rest of the holding period. Non-purely-temporary effects may take place when the liquidity shock has some signaling value for the monetary policy stance; however, little if any evidence of shocks of this kind is found. The liquidity effect is read off the slope of a euro-area-wide demand equation for daily reserves which incorporates the current as well as the expected overnight rate among the regressors. The two elasticities are very similar in absolute value and have opposite signs; this is consistent with the announcement effect, the ability by the central bank to influence the current rate without resorting to open market operations. The area-wide demand curve is retrieved by estimating separate relationships for each of the 11 euro-area national banking systems. Some heterogeneity across the different countries is detected. In particular, in some cases the demand for reserves turns out to be interest rate-inelastic over the holding period, suggesting that there is room for further efficiency improvements.

Suggested Citation

  • Paolo Angelini, 2002. "Liquidity and Announcement Effects in the Euro Area," Temi di discussione (Economic working papers) 451, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_451_02
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Tapking, Jens, 2006. "Multiple equilibrium overnight rates in a dynamic interbank market game," Games and Economic Behavior, Elsevier, vol. 56(2), pages 350-370, August.
    2. Leonardo Bartolini & Alessandro Prati, 2003. "The execution of monetary policy: a tale of two central banks," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 435-467, October.
    3. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438 Elsevier.
    4. 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.
    5. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    6. repec:eee:jbfina:v:83:y:2017:i:c:p:232-248 is not listed on IDEAS
    7. Jérôme Vandenbussche & Szabolcs Blazsek & Stanley Watt, 2012. "The liquidity and liquidity distribution effects in emerging markets: evidence from Jordan," Applied Financial Economics, Taylor & Francis Journals, vol. 22(3), pages 231-242, February.
    8. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
    9. Ejerskov, Steen & Martin Moss, Clara & Stracca, Livio, 2003. "How does the ECB allot liquidity in its weekly main refinancing operations? A look at the empirical evidence," Working Paper Series 244, European Central Bank.
    10. Giuseppe Bruno & Ernesto Maurizio Ordine & Antonio Scalia, 2005. "Banks� participation in the Eurosystem auctions and money market integration," Temi di discussione (Economic working papers) 562, Bank of Italy, Economic Research and International Relations Area.
    11. Gianfranco A. Vento, 2004. "The Eurosystem operational framework, use of colleteral and liquidity distribution in the euro area: towards a single interbank market?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 71-100.
    12. Livio Stracca & Clara Martin Moss & Livio Stracca, 2004. "Demand and supply in the ECB's main refinancing operations," Money Macro and Finance (MMF) Research Group Conference 2003 94, Money Macro and Finance Research Group.
    13. Gianfranco A. Vento, 2004. "The Eurosystem operational framework, use of colleteral and liquidity distribution in the euro area: towards a single interbank market?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 71-100.
    14. 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.

    More about this item

    Keywords

    liquidity effect; announcement effect; overnight; martingale; interbank market;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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