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The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management

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  • Bindseil, Ulrich
  • Jabłecki, Juliusz

Abstract

Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. It is shown that the wider the corridor, the greater the interbank turnover, the leaner the central bank’s balance sheet (i.e. the lower the average recourse to standing facilities) and the greater short-term interest rate volatility. The obtained relationships are matched with central bank preferences to obtain an optimal corridor width. The model is tested against euro area and Hungarian daily data encompassing the financial crisis that began in 2007. JEL Classification: E4, E5

Suggested Citation

  • Bindseil, Ulrich & Jabłecki, Juliusz, 2011. "The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management," Working Paper Series 1350, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111350
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1350.pdf
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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.
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    Cited by:

    1. Green, Christopher & Bai, Ye & Murinde, Victor & Ngoka, Kethi & Maana, Isaya & Tiriongo, Samuel, 2016. "Overnight interbank markets and the determination of the interbank rate: A selective survey," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 149-161.
    2. Link, Thomas & Neyer, Ulrike, 2017. "Friction-induced interbank rate volatility under alternative interest corridor systems," DICE Discussion Papers 259, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Francisco Blasques & Falk Bräuning & Iman van Lelyveld, 2015. "A dynamic network model of the unsecured interbank lending market," BIS Working Papers 491, Bank for International Settlements.
    4. Abbassi, Puriya & Bräuning, Falk & Schulze, Niels, 2017. "Bargaining power and outside options in the interbank lending market," Discussion Papers 31/2017, Deutsche Bundesbank.
    5. Vollmer, Uwe & Wiese, Harald, 2016. "Central bank standing facilities, counterparty risk, and OTC-interbank lending," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 101-122.
    6. Ahmet Aysan & Salih Fendoglu & Mustafa Kilinc, 2014. "Managing short-term capital flows in new central banking: unconventional monetary policy framework in Turkey," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 4(1), pages 45-69, June.
    7. Eser, Fabian & Carmona Amaro, Marta & Iacobelli, Stefano & Rubens, Marc, 2012. "The use of the Eurosystem's monetary policy instruments and operational framework since 2009," Occasional Paper Series 135, European Central Bank.
    8. repec:voj:journl:v:63:y:2016:i:4:p:455-473 is not listed on IDEAS
    9. repec:spr:pharme:v:4:y:2014:i:1:p:45-69 is not listed on IDEAS
    10. Link, Thomas & Neyer, Ulrike, 2016. "Transaction Cost Heterogeneity in the Interbank Market and Monetary Policy Implementation under alternative Interest Corridor Systems," Annual Conference 2016 (Augsburg): Demographic Change 145853, Verein für Socialpolitik / German Economic Association.
    11. Osborne, Matthew, 2016. "Monetary policy and volatility in the sterling money market," Bank of England working papers 588, Bank of England.

    More about this item

    Keywords

    liquidity management; money market; standing facilities;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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