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Interest Rate Corridor, Liquidity Management and the Overnight Spread

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Listed:
  • Hande Kucuk
  • Pinar Ozlu
  • Anil Talasli
  • Deren Unalmis
  • Canan Yuksel

Abstract

Recently, massive global liquidity has compelled many emerging market economies to change their monetary policy frameworks in order to address the financial stability challenges posed by volatile capital flows. In this respect, as of the second half of 2010, the Central Bank of the Republic of Turkey (CBRT) has developed additional policy instruments to support the adoption of financial stability as a complementary objective to price stability. Liquidity management has actively been used in conjunction with a wide interest rate corridor to smooth excessive volatility in shortterm capital inflows. As a result, the spread between the Borsa Istanbul overnight repo interest rate and the CBRT average funding rate (overnight spread) has become wider and more volatile. We analyze the determinants of the overnight spread using data from both the traditional and the new monetary policy episodes and empirically document that this spread has recently been influenced by various factors which are directly or closely related to the liquidity policy of the CBRT.

Suggested Citation

  • Hande Kucuk & Pinar Ozlu & Anil Talasli & Deren Unalmis & Canan Yuksel, 2014. "Interest Rate Corridor, Liquidity Management and the Overnight Spread," Working Papers 1402, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:1402
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    References listed on IDEAS

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    Cited by:

    1. Hakan Kara, 2016. "A brief assessment of Turkey's macroprudential policy approach : 2011–2015," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 16(3), pages 85-92.
    2. Murat Uysal, 2017. "Financial stability and macroprudential policy in Turkey," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential policy frameworks, implementation and relationships with other policies, volume 94, pages 349-364, Bank for International Settlements.
    3. Gül, Selçuk & Taştan, Hüseyin, 2020. "The impact of monetary policy stance, financial conditions, and the GFC on investment-cash flow sensitivity," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 692-707.
    4. Bank for International Settlements, 2017. "Macroprudential frameworks, implementation and relationship with other policies," BIS Papers, Bank for International Settlements, number 94.
    5. Serdar Varlik & M. Hakan Berument, 2020. "Monetary policy under a multiple‐tool environment," Bulletin of Economic Research, Wiley Blackwell, vol. 72(3), pages 225-250, July.
    6. Neslihan Turguttopbas, 2017. "Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 6(2), pages 45-64.
    7. Monika Bucher & Achim Hauck & Ulrike Neyer, 2020. "Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 165-222, July.

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    More about this item

    Keywords

    Overnight interest rate; liquidity policy; monetary policy; operational framework;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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