Central Bank Forecasts of Liquidity Factors: Quality, Publication and the Control of the Overnight Rate

42 Pages Posted: 24 Feb 2003

Date Written: July 2001

Abstract

A simple model of the interaction between central bank liquidity management and the inter-bank overnight rate is suggested which helps understanding the effects of the publication of forecasts of liquidity factors by the European Central Bank adopted in June 2000. The paper argues that the main practical advantage of the publication of these forecasts is that it makes the signal extraction problem with regard to the central bank's operational intentions trivial and hence allows establishing a superior behavioural equilibrium between the central bank and the money market participants. In this equilibrium, the central bank can achieve a better steering of overnight rates than under private autonomous factor forecasts, depending of course also on the quality of liquidity forecasts. It is furthermore shown that the publication of an average of autonomous factors, such as adopted by the ECB, is, at least within the model presented, superior to the separate publication of autonomous factors for each single day.

Keywords: Monetary Policy instruments; money market; signal extractions

JEL Classification: D84, E52

Suggested Citation

Bindseil, Ulrich, Central Bank Forecasts of Liquidity Factors: Quality, Publication and the Control of the Overnight Rate (July 2001). Available at SSRN: https://ssrn.com/abstract=356202

Ulrich Bindseil (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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