A Simple Interest Rate Model with Unobserved Components: The Role of the Interbank Reference Rate
In this study, we theoretically investigate the potential role of the reference rate in stabilizing or destabilizing an interbank market with an environment where individual banks cannot fully identify the nature of underlying shocks affecting their interbank transactions. We show that a noise-free reference rate based on a sufficient number of sample transactions can help to make the market interest rate less volatile, whereas the stabilizing effects of the reference rate are significantly reduced if the reported interest rates contain some noisy components. Nevertheless, by increasing the number of sample transactions reflected in the reference rate, the adverse effects of the noise can be mitigated (or eliminated) provided the noise is idiosyncratic to individual transactions. However, if the noise is common to multiple transactions, then the adverse effects of the noisy reference rate cannot be reduced simply by increasing the number of sample transactions. This suggests that the noise in the interest rates reported by just a few of large banks can end up making the entire market more volatile, thereby impairing the transmission mechanism of monetary policy.
|Date of creation:||11 Dec 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- Abrantes-Metz, Rosa M. & Kraten, Michael & Metz, Albert D. & Seow, Gim S., 2012. "Libor manipulation?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 136-150.
- Deborah Gefang & Gary Koop & Simon Potter, 2011.
"Understanding Liquidity and Credit Risks in the Financial Crisis,"
1114, University of Strathclyde Business School, Department of Economics.
- Gefang, Deborah & Koop, Gary & Potter, Simon M., 2011. "Understanding liquidity and credit risks in the financial crisis," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 903-914.
- Deborah Gefang & Gary Koop & Simon M. Potter, 2010. "Understanding Liquidity and Credit Risks in the Financial Crisis," Working Paper Series 45_10, The Rimini Centre for Economic Analysis.
- Gefang, Deborah & Koop, Gary & Potter, Simon M., 2011. "Understanding Liquidity and Credit Risks in the Financial Crisis," SIRE Discussion Papers 2011-26, Scottish Institute for Research in Economics (SIRE).
- Paolo Angelini & Andrea Nobili & Cristina Picillo, 2011.
"The Interbank Market after August 2007: What Has Changed, and Why?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 43(5), pages 923-958, 08.
- Paolo Angelini & Andrea Nobili & Maria Cristina Picillo, 2009. "The interbank market after August 2007: what has changed, and why?," Temi di discussione (Economic working papers) 731, Bank of Italy, Economic Research and International Relations Area.
- Muto, Ichiro & Sudo, Nao & Yoneyama, Shunichi, 2013. "Productivity Slowdown in Japan’s Lost Decades: How Much of It is Attributed to Financial Factors?," Dynare Working Papers 28, CEPREMAP.
- Michael Woodford, 2010. "Financial Intermediation and Macroeconomic Analysis," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 21-44, Fall.
- John B. Taylor & John C. Williams, 2008.
"A black swan in the money market,"
Working Paper Series
2008-04, Federal Reserve Bank of San Francisco.
- John C. Williams & John B. Taylor, 2009. "A Black Swan in the Money Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 58-83, January.
- John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
- Christian Ewerhart & Nuno Cassola & Steen EJjerksov & Natacha Valla, .
"Manipulation in Money Markets,"
Swiss Finance Institute Research Paper Series
06-29, Swiss Finance Institute.
- Ichiro Muto, 2007.
"Productivity Growth, Transparency, and Monetary Policy,"
IMES Discussion Paper Series
07-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
- Muto, Ichiro, 2013. "Productivity growth, transparency, and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 329-344.
- Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2010.
"Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk,"
CEPR Discussion Papers
7762, C.E.P.R. Discussion Papers.
- Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," Working Paper Series 1126, European Central Bank.
- Marie Hoerova & Cornelia Holthausen & Florian Heider, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," 2009 Meeting Papers 929, Society for Economic Dynamics.
- Heider, F. & Hoerova, M. & Holthausen, C., 2009. "Liquidity Hoarding and Interbank Market Spreads : The Role of Counterparty Risk," Discussion Paper 2009-40 S, Tilburg University, Center for Economic Research.
- John Oâ€™Neill, 2009. "Market," Chapters, in: Handbook of Economics and Ethics, chapter 42 Edward Elgar.
- Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
- Nao Sudou, 2012. "Financial Markets, Monetary Policy and Reference Rates: Assessments in DSGE Framework," Bank of Japan Working Paper Series 12-E-12, Bank of Japan.
- Jacob Gyntelberg & Philip Wooldridge, 2008. "Interbank rate fixings during the recent turmoil," BIS Quarterly Review, Bank for International Settlements, March.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43220. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.