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Identifying the Effect of Bank of Japan's Liquidity Provision on the Year-End Premium: A Structural Approach

Author

Listed:
  • Yasuo Hirose

    (Bank of Japan)

  • Shinsuke Ohyama

    (Bank of Japan)

  • Ken Taniguchi

    (Bank of Japan)

Abstract

To what extent did the Bank of Japan's liquidity provisions reduce the premium on money market rates over the year-ends in Japan? To answer this question, we propose a simple structural model that illustrates the year-end operations and the year-end interbank money markets. Based on the structural model, we identify the effects of the year-end operations as differences between the actual premium in the year-end money market and the counterfactual premium without the operations, and decompose the effects into two factors: the amount of liquidity supplied and the steepness of the banks' liquidity demand curve. We find that the operations over the year-end and the fiscal year-end of 2008 had the largest effects among those from 2006 to 2008, reflecting the fact that the Bank of Japan had significantly expanded liquidity provisions in response to the decrease in market liquidity under the financial turmoil.

Suggested Citation

  • Yasuo Hirose & Shinsuke Ohyama & Ken Taniguchi, 2009. "Identifying the Effect of Bank of Japan's Liquidity Provision on the Year-End Premium: A Structural Approach," Bank of Japan Working Paper Series 09-E-6, Bank of Japan.
    • Handle: RePEc:boj:bojwps:09-e-6
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2009/data/wp09e06.pdf
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    References listed on IDEAS

    as
    1. Mark D. Griffiths & Drew B. Winters, 2005. "The Turn of the Year in Money Markets: Tests of the Risk-Shifting Window Dressing and Preferred Habitat Hypotheses," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1337-1364, July.
    2. Downing, Chris & Oliner, Stephen, 2007. "The term structure of commercial paper rates," Journal of Financial Economics, Elsevier, vol. 83(1), pages 59-86, January.
    3. Kotomin, Vladimir & Smith, Stanley D. & Winters, Drew B., 2008. "Preferred habitat for liquidity in international short-term interest rates," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 240-250, February.
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    Cited by:

    1. Yasuo Hirose & Shinsuke Ohyama, 2009. "Identifying the Effect of Bank of Japan's Liquidity Facilities: The Case of CP Operations During Financial Turmoil," Bank of Japan Working Paper Series 09-E-7, Bank of Japan.
    2. Hirose, Yasuo & Ohyama, Shinsuke & Taniguchi, Ken, 2012. "The effects of Bank of Japan’s liquidity provision on the year-end premium," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 179-185.
    3. Yasuo Hirose & Shinsuke Ohyama, 2010. "Identifying the Effect of the Bank of Japan's Liquidity Facilities: The Case of Commercial Paper Operations During the Financial Turmoil," International Finance, Wiley Blackwell, vol. 13(3), pages 461-483, December.

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    More about this item

    Keywords

    Money market operation; Year-end; Monetary policy;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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