Research Discussion Papers, Bank of Finland
No 7/1998:
The Overnight Rate of Interest under Averaged Reserve Requirements
Tuomas Välimäki ()
Abstract: Averaging the reserve requirement is often considered an
efficient way to reduce volatility at the very short end of the money
market yield curve. The Bank of Finland began to apply an averaging
provision at the beginning of October 1995. Notably, the volatility of the
overnight rate of interest in the Finnish money markets has increased since
the start of the averaging scheme. This paper builds up a simple model of
the determination of the overnight rate of interest. The effects of both
the averaging scheme and the central bank's reaction to the bids it
receives in money market tenders are evaluated against the model. The paper
ends with an evaluation of the empirical evidence from the first two years
that have passed since the introduction of the averaging provision in
Finland.
Keywords: money market tenders; minimum reserves; liquidity; averaging; convexity; interest rate volatility; (follow links to similar papers)
38 pages, April 27, 1998
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