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Money market volatility, A simulation study

  • Kempa , Michal

    ()

    (RUESG, University of Helsinki and Bank of Finland)

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    This paper analyses different operational central bank policies and their impact on the behaviour of the money market interest rate. The model combines profit maximising behaviour by commercial banks with the central bank supplying the liquidity that keeps the market rate on target. It seems that frequent liquid-ity supplying operations represent an efficient tool to control money market rates. An averaging provision reduces the use of standing facilities and interest rates volatility in all days except for the last day of the maintenance period. Whenever banks have different maintenance horizons both the spikes in volatility and use of standing facilities disappear. The paper also compares two different liquidity supply policies and finds that the level of liquidity necessary to keep the rates on target depends on not only the aggregate but also assets values of individual banks.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0613netti.pdf
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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 13/2006.

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    Length: 39 pages
    Date of creation: 12 Jun 2006
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2006_013
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/

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    1. Leonardo Bartolini & Giuseppe Bertoli & Alessandro Prati, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," Econometric Society World Congress 2000 Contributed Papers 0123, Econometric Society.
    2. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 0393, European Central Bank.
    3. Gaspar, Vítor & Pérez-Quirós, Gabriel & Rodriguez Mendizabal, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers.
    4. Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2003. "The daily market for funds in Europe: what has changed with the EMU," Banco de Espa�a Working Papers 0313, Banco de Espa�a.
    5. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York.
    6. Leonardo Bartolini & Alessandro Prati, 2003. "Cross-country differences in monetary policy execution and money market rates' volatility," Staff Reports 175, Federal Reserve Bank of New York.
    7. 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.
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