Working Paper: CEPR ID: DP4516
Authors: Vitor Gaspar; Gabriel Pérez-Quirós; Hugo Rodríguez Mendizabal
Abstract: The purpose of this Paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross-section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities is also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.
Keywords: Eonia; Panel; Monetary Policy Instruments; Overnight Interest Rate
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| operational framework of monetary policy (E52) | reduction in the elasticity of the supply of funds by banks (G21) |
| reduction in the elasticity of the supply of funds by banks (G21) | increased volatility and trade in the overnight market (G15) |
| increased volatility and trade in the overnight market (G15) | higher volumes of trade and greater use of standing facilities (F10) |
| operational framework of monetary policy (E52) | behavior of banks in the overnight market (G21) |
| behavior of banks in the overnight market (G21) | distribution of interest rates across banks (E43) |