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Overnight rate and signalling effects of central bank bills

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  • Canetg, Fabio
  • Kaufmann, Daniel

Abstract

We analyse the impact of interest-bearing central bank bills on financial market variables in Switzerland. The unique institutional setting allows us to identify the causal effects of two orthogonal shocks occurring on days with central bank bill auctions through heteroscedasticity: an overnight interest rate shock and a signalling shock. The first shock raises the overnight interest rate and modestly appreciates the exchange rate. The signalling shock appreciates the exchange rate more strongly. In addition, it lowers stock prices, long-term interest rates, as well as inflation expectations, and it raises corporate bond spreads. The signalling shock is economically more important for forward-looking variables than the overnight rate shock. The results suggest that liquidity-absorbing operations between official monetary policy decisions affect financial market variables by revealing information about the central bank’s future policy actions.

Suggested Citation

  • Canetg, Fabio & Kaufmann, Daniel, 2022. "Overnight rate and signalling effects of central bank bills," European Economic Review, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eecrev:v:143:y:2022:i:c:s0014292122000216
    DOI: 10.1016/j.euroecorev.2022.104060
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    2. Marc Burri & Daniel Kaufmann, 2024. "Multi-dimensional monetary policy shocks based on heteroscedasticity," IRENE Working Papers 24-03, IRENE Institute of Economic Research.

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    More about this item

    Keywords

    Central bank bills; Exit strategies; Liquidity-absorbing operations; Signalling; Monetary policy shocks; Identification through heteroscedasticity;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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