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Demand for Reserves and the Central Bank's Management of Interest Rates

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  • Sébastien Kraenzlin
  • Martin Schlegel

Abstract

The implementation of monetary policy is prevalently done by interest rate targeting with a short term market rate serving as operational target. The instruments for achieving the operational target are the provision of reserves and the interest rate charged in these transactions. This paper presents a model for the estimation of the demand curve for reserves, derived from the central bank's fixed rate tender auction and the interbank money market. Using data from Switzerland, the slope of the demand curve is estimated. Furthermore, properties of the demand curve such as the slope patterns in the course of a maintenance period and the slope in different monetary regimes are assessed. We find a steeper demand curve towards the end of the maintenance period and an increasing slope when the general interest rate level is high. Further, we investigate the role of the Swiss National Bank's (SNB) interest rate in the fixed rate tender auctions. There is evidence that the SNB uses its auction rate to guide the interbank market rate.

Suggested Citation

  • Sébastien Kraenzlin & Martin Schlegel, 2012. "Demand for Reserves and the Central Bank's Management of Interest Rates," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(IV), pages 531-555, December.
    • Handle: RePEc:ses:arsjes:2012-iv-3
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    References listed on IDEAS

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    1. Dieter Nautz & Jörg Oechssler, 2003. "The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(2), pages 207-220, June.
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    4. Shino, Junnosuke, 2013. "A positive theory of fixed-rate funds-supplying operations in an accommodative financial environment," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 595-610.
    5. Nautz, Dieter & Oechssler, Jorg, 2006. "Overbidding in fixed rate tenders--an empirical assessment of alternative explanations," European Economic Review, Elsevier, vol. 50(3), pages 631-646, April.
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    7. Ehrhart, Karl-Martin, 2000. "A Well-known Rationing Game," Sonderforschungsbereich 504 Publications 01-36, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    9. Ángel León & Francis Benito & Juan Nave, 2006. "Modeling The Euro Overnight Rate," Working Papers. Serie AD 2006-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    12. Ehrhart, Karl-Martin, 2001. "European Central Bank operations: experimental investigation of the fixed rate tender," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 871-893, November.
    13. Sébastien Kraenzlin, 2007. "The characteristics and development of the Swiss franc repurchase agreement market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(2), pages 241-261, June.
    14. Breitung, Jorg & Nautz, Dieter, 2001. "The empirical performance of the ECB's repo auctions: evidence from aggregated and individual bidding data," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 839-856, November.
    15. Sébastien Kraenzlin, 2009. "Interest Rate Setting on the Swiss Franc Repo Market," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(III), pages 351-377, September.
    16. Ehrhart, Karl-Martin, 2001. "European Central Bank Operations: Experimental Investigation of Variable Rate Tenders," Sonderforschungsbereich 504 Publications 01-37, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    Cited by:

    1. Anna Sznajderska, 2016. "Wpływ sposobu zarządzania płynnością, premii za ryzyko i oczekiwań na stopy rynku międzybankowego w Polsce," Bank i Kredyt, Narodowy Bank Polski, vol. 47(1), pages 61-90.
    2. Prof. Dr. Sébastien P. Kraenzlin & Benedikt von Scarpatetti, 2011. "Bargaining Power in the Repo Market," Working Papers 2011-14, Swiss National Bank.
    3. Berentsen, Aleksander & Kraenzlin, Sébastien & Müller, Benjamin, 2018. "Exit strategies for monetary policy," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 20-40.

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    More about this item

    Keywords

    Implementation of monetary policy; money demand; fixed rate tender auction; repo; Switzerland;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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