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Money market volatility: a simulation study

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  • Kempa, Michal

Abstract

This paper analyses different operational central bank policies and their impact on the behaviour of the money market interest rate. The model combines profit maximising behaviour by commercial banks with the central bank supplying the liquidity that keeps the market rate on target.It seems that frequent liquidity supplying operations represent an efficient tool to control money market rates.An averaging provision reduces the use of standing facilities and interest rates volatility in all days except for the last day of the maintenance period.Whenever banks have different maintenance horizons both the spikes in volatility and use of standing facilities disappear.The paper also compares two different liquidity supply policies and finds that the level of liquidity necessary to keep the rates on target depends on not only the aggregate but also assets values of individual banks.

Suggested Citation

  • Kempa, Michal, 2006. "Money market volatility: a simulation study," Bank of Finland Research Discussion Papers 13/2006, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2006_013
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    References listed on IDEAS

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    1. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank.
    2. Vitor Gaspar & Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2004. "Interest Rate Determination in the Interbank Market," UFAE and IAE Working Papers 603.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    3. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
    4. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543.
    5. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    6. Albert H. Cox Jr. & Ralph F. Leach, 1964. "Defensive Open Market Operations And The Reserve Settlement Periods Of Member Banks," Journal of Finance, American Finance Association, vol. 19(1), pages 76-93, March.
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    Cited by:

    1. 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.
    2. 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.

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    More about this item

    Keywords

    Interbank market; interest rate volatility; central bank procedures; open market operations;
    All these keywords.

    JEL classification:

    • 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

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