The execution of monetary policy: a tale of two central banks
The Eurosystem and the U.S. Federal Reserve System follow quite different approaches to the execution of monetary policy. The former institution adopts a "hands-off" approach that largely delegates to depository institutions the task of stabilizing their own liquidity at high frequency. The latter institution follows a much more "hands-on" approach involving daily intervention to fine-tune the liquidity of the banking system. We review the implications of these contrasting approaches, focusing on their impact on the high-frequency behavior of very short-term interest rates. We also examine interest rate behavior following the Y2K date change and the 9/11/2001 crisis - events that required the two central banks to deviate significantly from their customary style of liquidity management. We find that, despite differences in operational framework, certain elements of the institutions' styles of day-to-day intervention have caused very short-term interest rates to behave similarly in the euro area and the United States. Significantly, during periods of anticipated or actual crisis, the two institutions have acted very much alike in managing the liquidity of the interbank market in response to shocks.
|Date of creation:||2003|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Paolo Angelini, 2008. "Liquidity And Announcement Effects In The Euro Area," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 67(1), pages 1-20, March.
- Gaspar, Vitor & Perez-Quiros, Gabriel & Sicilia, Jorge, 2001.
"The ECB Monetary Policy Strategy and the Money Market,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 6(4), pages 325-42, October.
- Gaspar, Vítor & Pérez Quirós, Gabriel & Sicilia, Jorge, 2001. "The ECB monetary policy strategy and the money market," Working Paper Series 0069, European Central Bank.
- Vítor Gaspar & Gabriel Perez-Quiros & Jorge Sicilia, 2001. "The ECB monetary policy strategy and the money market," Working Papers 47, Oesterreichische Nationalbank (Austrian Central Bank).
- Ayuso, J. & Repullo, R., 2001.
"Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Cental Bank,"
0104, Centro de Estudios Monetarios Y Financieros-.
- Ayuso, Juan & Repullo, Rafael, 2001. "Why did the banks overbid? An empirical model of the fixed rate tenders of the European Central Bank," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 857-870, November.
- Juan Ayuso & Rafael Repullo, 2001. "Why Did the Banks Overbid? An Empirical Model of the Fixed Rate Tenders of the European Central Bank," Banco de Espa�a Working Papers 0105, Banco de Espa�a.
- Bindseil, Ulrich, 2002. "Equilibrium bidding in the Eurosystem's open market operations," Working Paper Series 0137, European Central Bank.
- 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.
- Pérez Quirós, Gabriel & Rodríguez Mendizábal, Hugo, 2001. "The daily market for funds in Europe: Has something changed with the EMU?," Working Paper Series 0067, European Central Bank.
- Quiro, G.P. & Mendizabal, H.R., 2001. "The Daily Market for Funds in Europe: Has Something Changed with the EMU," Papers 67, Quebec a Montreal - Recherche en gestion.
- 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.
- Hartmann, Philipp & Manna, Michele & Manzanares, Andrés, 2001.
"The microstructure of the euro money market,"
Working Paper Series
0080, European Central Bank.
- Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May.
- Selva Demiralp & Òscar Jordà, 2002.
"The announcement effect: evidence from open market desk data,"
Economic Policy Review,
Federal Reserve Bank of New York, issue May, pages 29-48.
- Oscar Jorda & Selva Demiralp & Holly Liu & Jeffrey Williams, 2003. "The Announcement Effect: Evidence from Open Market Desk Data," Working Papers 14, University of California, Davis, Department of Economics.
- Selva Demiralp & Oscar Jorda, . "The Announcement Effect: Evidence from Open Market Desk Data," Department of Economics 01-04, California Davis - Department of Economics.
- Paul Bennett & Spence Hilton, 1997. "Falling reserve balances and the federal funds rate," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(May).
- Prati, Alessandro & Bartolini, Leonardo & Bertola, Giuseppe, 2003.
"The overnight interbank market: Evidence from the G-7 and the Euro zone,"
Journal of Banking & Finance,
Elsevier, vol. 27(10), pages 2045-2083, October.
- Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "The Overnight Interbank Market: Evidence from the G7 and the Euro Zone," CEPR Discussion Papers 3090, C.E.P.R. Discussion Papers.
- Alessandro Prati & Leonardo Bartolini & Giuseppe Bertola, 2001. "The overnight interbank market: evidence from the G-7 and the Euro zone," Staff Reports 135, Federal Reserve Bank of New York.
- Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
- Würtz, Flemming Reinhardt, 2003. "A comprehensive model on the euro overnight rate," Working Paper Series 0207, European Central Bank.
- Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi & Leora Klapper, 1997.
"Interest Rate Targeting and the Dynamics of Short-Term Rates,"
NBER Working Papers
5944, National Bureau of Economic Research, Inc.
- Balduzzi, Pierluigi, et al, 1998. "Interest Rate Targeting and the Dynamics of Short-Term Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 26-50, February.
- Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
- Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Denis Blenck & Harri Hasko & Spence Hilton & Kazuhiro Masaki, 2001. "The main features of the monetary policy frameworks of the Bank of Japan, the Federal Reserve and the Eurosystem," BIS Papers chapters, in: Bank for International Settlements (ed.), Comparing monetary policy operating procedures across the United States, Japan and the euro area, volume 9, pages 23-56 Bank for International Settlements.
- Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
- Ruckriegel, Karlheinz & Seitz, Franz, 2002. "The euro system and the federal reserve system compared: Facts and challenges," ZEI Working Papers B 02-2002, ZEI - Center for European Integration Studies, University of Bonn.
- Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:165. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber)
If references are entirely missing, you can add them using this form.