Liquidity, Information, and the Overnight Rate

38 Pages Posted: 14 Jun 2004

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Steen Ejerskov

European Central Bank (ECB)

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Date Written: July 2004

Abstract

We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generate an overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.

Keywords: Liquidity effect, asymmetric information, monetary policy implementation

JEL Classification: G14, G21, E52

Suggested Citation

Ewerhart, Christian and Cassola, Nuno and Ejerskov, Steen and Valla, Natacha, Liquidity, Information, and the Overnight Rate (July 2004). Available at SSRN: https://ssrn.com/abstract=556070

Christian Ewerhart (Contact Author)

University of Zurich, Department of Economics ( email )

Schoenberggasse 1
Zurich, CH-8001
Switzerland

Nuno Cassola

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Steen Ejerskov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Natacha Valla

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 13440 (Phone)

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42922756 (Phone)
+33 1 42926296 (Fax)

HOME PAGE: http://www.iue.it/Personal/Researchers/valla/

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