The Optimal Width of the Central Bank Standing Facilities Corridor and Banks' Day - to - Day Liquidity Management

37 Pages Posted: 7 Jun 2011

See all articles by Ulrich Bindseil

Ulrich Bindseil

European Central Bank (ECB)

Juliusz Jablecki

National Bank of Poland

Date Written: May 25, 2011

Abstract

Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. It is shown that the wider the corridor, the greater the interbank turnover, the leaner the central bank’s balance sheet (i.e. the lower the average recourse to standing facilities) and the greater short-term interest rate volatility. The obtained relationships are matched with central bank preferences to obtain an optimal corridor width. The model is tested against euro area and Hungarian daily data encompassing the financial crisis that began in 2007.

Keywords: standing facilities, money market, liquidity management

JEL Classification: E4, E5

Suggested Citation

Bindseil, Ulrich and Jablecki, Juliusz, The Optimal Width of the Central Bank Standing Facilities Corridor and Banks' Day - to - Day Liquidity Management (May 25, 2011). ECB Working Paper No. 1350, Available at SSRN: https://ssrn.com/abstract=1852266

Ulrich Bindseil

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Juliusz Jablecki (Contact Author)

National Bank of Poland ( email )

Poland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
147
Abstract Views
969
rank
240,098
PlumX Metrics