Interest Rate Determination in the Interbank Market

50 Pages Posted: 14 Oct 2004

See all articles by Vitor Gaspar

Vitor Gaspar

European Commission

Gabriel Perez-Quiros

Banco de España

Hugo Rodríguez Mendizábal

Institut d'Anàlisi Econòmica (CSIC)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.

Keywords: Overnight interest rate, Monetary policy instruments, Eonia panel

JEL Classification: E52, E58

Suggested Citation

Gaspar, Vitor and Perez-Quiros, Gabriel and Rodríguez Mendizábal, Hugo, Interest Rate Determination in the Interbank Market (April 2004). Available at SSRN: https://ssrn.com/abstract=533013

Vitor Gaspar (Contact Author)

European Commission ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7200 (Phone)
+49 69 1344 6575 (Fax)

Gabriel Perez-Quiros

Banco de España ( email )

Madrid 28014
Spain

Hugo Rodríguez Mendizábal

Institut d'Anàlisi Econòmica (CSIC) ( email )

UAB Campus
E-08193 Bellaterra
Spain

HOME PAGE: http://rodriguez.iae-csic.org/

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