Is There a Liquidity Effect in the Japanese Market?
This paper examines whether there is a liquidity effect in the Japanese interbank market for overnight loans. If the reserve requirement is the only reason for banks to hold reserves, then the demand for reserves should be infinitely elastic at the overnight rate that is expected to prevail for the rest of the reserve maintenance period. If, however, reserves are also useful for facilitating transactions between banks, then the demand curve will be down-sloping as a function of the overnight rate. We say that a liquidity effect exists if the demand curve is downward sloping, not horizontal, at the observed level of reserves. Estimating the slope of the demand curve for reserves must deal with the simultaneity problem because the central bank actively chooses the supply of reserves to guide the overnight rate to a range close to the target rate. This paper estimates the liquidity effect in the Japanese interbank market for overnight loans (the so-called Call market). The estimation exploits the institutional features, particularly the fact that the rates observed in the morning are forward rates for funds deliverable at 1 pm of the day. The results indicate that the large injection of reserves by the Bank of Japan after the Yamaichi debacle was not enough to eliminate the liquidity effect. The evidence found in this paper is consistent with the view that the Desk behaved optimally before and after the Yamachi debacle.
|Date of creation:||2000|
|Contact details of provider:|| Postal: 200 Littauer Center, Cambridge, MA 02138|
Web page: http://www.economics.harvard.edu/journals/hier
More information through EDIRC
References listed on IDEAS
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.:
- James D. Hamilton, 1996.
"Measuring the liquidity effect,"
Working Papers in Applied Economic Theory
96-06, Federal Reserve Bank of San Francisco.
- Eric M. Leeper & David B. Gordon, 1991.
"In search of the liquidity effect,"
International Finance Discussion Papers
403, Board of Governors of the Federal Reserve System (U.S.).
- Ryuzo Miyao, 1999. "The Effects of Monetary Policy in Japan," Discussion Paper Series 107, Research Institute for Economics & Business Administration, Kobe University.
- Craig Furfine, 1998. "Interbank payments and the daily federal funds rate," Finance and Economics Discussion Series 1998-31, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:fth:harver:1898. 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: (Thomas Krichel)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.