IDEAS home Printed from https://ideas.repec.org/a/spr/inecre/v55y2020i1d10.1007_s41775-020-00084-4.html
   My bibliography  Save this article

Steering interest rates amidst large structural surplus liquidity: a tale of three central banks

Author

Listed:
  • Janak Raj

    (Reserve Bank of India)

  • Joice John

    (Reserve Bank of India)

Abstract

This paper focuses on as to how three central banks, viz. the United States Federal Reserve (US Fed), the European Central Bank (ECB) and the Reserve Bank of India (RBI), steered interest rates in the face of large surplus liquidity. This study finds that it is challenging to steer the interest rate in the middle of the corridor when there is large surplus liquidity. However, the floor of the policy corridor (the ECB and the RBI) and the interest rates on excess reserves (the US Fed) prevented overnight interest rates from collapsing. As such, the relationship between interest rates and surplus liquidity was found to be non-linear, i.e. beyond a certain threshold, surplus liquidity had no material additional impact on interest rates.

Suggested Citation

  • Janak Raj & Joice John, 2020. "Steering interest rates amidst large structural surplus liquidity: a tale of three central banks," Indian Economic Review, Springer, vol. 55(1), pages 93-116, June.
    • Handle: RePEc:spr:inecre:v:55:y:2020:i:1:d:10.1007_s41775-020-00084-4
    DOI: 10.1007/s41775-020-00084-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s41775-020-00084-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s41775-020-00084-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hillebrand Eric & Medeiros Marcelo C. & Xu Junyue, 2013. "Asymptotic Theory for Regressions with Smoothly Changing Parameters," Journal of Time Series Econometrics, De Gruyter, vol. 5(2), pages 133-162, April.
    2. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June.
    3. Thórarinn G. Pétursson, 2001. "The transmission mechanism of monetary policy: Analysing the financial market pass-through," Economics wp14_thorarinn, Department of Economics, Central bank of Iceland.
    4. McAleer, Michael & Medeiros, Marcelo C., 2008. "A multiple regime smooth transition Heterogeneous Autoregressive model for long memory and asymmetries," Journal of Econometrics, Elsevier, vol. 147(1), pages 104-119, November.
    5. Reserve Bank of India RBI, 2017. "Macroeconomic Impact of Demonetisation-A Preliminary Assessment," Working Papers id:11657, eSocialSciences.
    6. repec:zbw:bofrdp:1996_022 is not listed on IDEAS
    7. Carla Soares & Paulo M. M. Rodrigues, 2013. "Determinants of the EONIA Spread and the Financial Crisis," Manchester School, University of Manchester, vol. 81, pages 82-110, October.
    8. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
    9. Reserve Bank of India RBI, 2017. "Macroeconomic Impact of Demonetisation: A Preliminary Assessment," Working Papers id:11665, eSocialSciences.
    10. Beirne, John, 2012. "The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 534-551.
    11. Eisenschmidt, Jens & Kedan, Danielle & Tietz, Robin Darius, 2018. "Measuring fragmentation in the euro area unsecured overnight interbank money market," Economic Bulletin Articles, European Central Bank, vol. 5.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Janak Raj & Joice John, 0. "Steering interest rates amidst large structural surplus liquidity: a tale of three central banks," Indian Economic Review, Springer, vol. 0, pages 1-24.
    2. Olivier Brossard & Susanna Saroyan, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Post-Print hal-01293693, HAL.
    3. Brossard, Olivier & Saroyan, Susanna, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 163-185.
    4. Acharya, Viral V. & Imbierowicz, Björn & Steffen, Sascha & Teichmann, Daniel, 2020. "Does the lack of financial stability impair the transmission of monetary policy?," Journal of Financial Economics, Elsevier, vol. 138(2), pages 342-365.
    5. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    6. Vijay Victor & Joshy Joseph Karakunnel & Swetha Loganathan & Daniel Francois Meyer, 2021. "From a Recession to the COVID-19 Pandemic: Inflation–Unemployment Comparison between the UK and India," Economies, MDPI, vol. 9(2), pages 1-19, May.
    7. Nyborg, Kjell G., 2017. "Reprint of: Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 232-248.
    8. Hilaire, Alvin & Mahabir, Reshma, 2020. "The great exchange: Rapid demonetization in Trinidad and Tobago," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    9. T.P. Ghosh, 2017. "Efficacy of Demonetisation in Eliminating Black Money," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 8(5), pages 71-85, November.
    10. Piotr Fiszeder & Ilona Pietryka, 2018. "Monetary policy in steering the EONIA and POLONIA rates in the Eurosystem and Poland: a comparative analysis," Empirical Economics, Springer, vol. 55(2), pages 445-470, September.
    11. Jorge M. Uribe, 2018. "“Scaling Down Downside Risk with Inter-Quantile Semivariances”," IREA Working Papers 201826, University of Barcelona, Research Institute of Applied Economics, revised Oct 2018.
    12. Renne Jean-Paul, 2017. "A model of the euro-area yield curve with discrete policy rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(1), pages 99-116, February.
    13. Beaupain, Renaud & Durré, Alain, 2016. "Excess liquidity and the money market in the euro area," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 33-44.
    14. Green, Christopher & Bai, Ye & Murinde, Victor & Ngoka, Kethi & Maana, Isaya & Tiriongo, Samuel, 2016. "Overnight interbank markets and the determination of the interbank rate: A selective survey," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 149-161.
    15. Nicole Boyson & Jean Helwege & Jan Jindra, 2014. "Crises, Liquidity Shocks, and Fire Sales at Commercial Banks," Financial Management, Financial Management Association International, vol. 43(4), pages 857-884, December.
    16. S. Gabrieli & C.-P. Georg, 2014. "A network view on interbank market freezes," Working papers 531, Banque de France.
    17. Kang, Wensheng & Ratti, Ronald A. & Vespignani, Joaquin L., 2016. "Chinese liquidity increases and the U.S. economy," Economic Modelling, Elsevier, vol. 52(PB), pages 764-771.
    18. Degryse, Hans & Karas, Alexei & Schoors, Koen, 2019. "Relationship lending during a trust crisis on the interbank market: A friend in need is a friend indeed," Economics Letters, Elsevier, vol. 182(C), pages 1-4.
    19. Hongcheng Ding & Xuanze Zhao & Zixiao Jiang & Shamsul Nahar Abdullah & Deshinta Arrova Dewi, 2024. "EUR-USD Exchange Rate Forecasting Based on Information Fusion with Large Language Models and Deep Learning Methods," Papers 2408.13214, arXiv.org.
    20. Andrea Bucci, 2020. "Realized Volatility Forecasting with Neural Networks," Journal of Financial Econometrics, Oxford University Press, vol. 18(3), pages 502-531.

    More about this item

    Keywords

    Steering of interest rates; Structural surplus liquidity; Liquidity management;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:inecre:v:55:y:2020:i:1:d:10.1007_s41775-020-00084-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.