Download this Paper Open PDF in Browser

What Explains the Spread Between the Euro Overnight Rate and the ECB's Policy Rate?

40 Pages Posted: 23 Dec 2008  

Tobias Linzert

European Central Bank (ECB); IZA Institute of Labor Economics

Sandra Schmidt

Centre for European Economic Research (ZEW)

Multiple version iconThere are 2 versions of this paper

Date Written: December 3, 2008

Abstract

We employ a time series econometric framework to explore the structural determinants of the spread between the European Overnight Rate and the ECB's Policy Rate (EONIA spread) aiming to explain the widening of the EONIA spread from mid-2004 to mid-2006. In particular, we estimate a model on the EONIA spread since the introduction of the new operational framework in March 2004 until August 2006. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks' liquidity uncertainty lead to a significant upward pressure on the spread. The ECB's liquidity policy only reduces the spread if a loose policy is conducted during the last week of a maintenance period. Interestingly, interest rate expectations have not been found to have an important influence.

Keywords: Overnight Market Rate (EONIA), Interest Rate Determination, Monetary Policy Implementation, Operational Framework

JEL Classification: E43, E52, C22

Suggested Citation

Linzert, Tobias and Schmidt, Sandra, What Explains the Spread Between the Euro Overnight Rate and the ECB's Policy Rate? (December 3, 2008). ECB Working Paper No. 983. Available at SSRN: https://ssrn.com/abstract=1310621

Tobias Linzert (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Sandra Schmidt

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Paper statistics

Downloads
66
Rank
163,695
Abstract Views
495