Research Discussion Papers, Bank of Finland
No 13/2006:
Money market volatility, A simulation study
Michal Kempa ()
Abstract: This paper analyses different operational central bank
policies and their impact on the behaviour of the money market interest
rate. The model combines profit maximising behaviour by commercial banks
with the central bank supplying the liquidity that keeps the market rate on
target. It seems that frequent liquid-ity supplying operations represent an
efficient tool to control money market rates. An averaging provision
reduces the use of standing facilities and interest rates volatility in all
days except for the last day of the maintenance period. Whenever banks have
different maintenance horizons both the spikes in volatility and use of
standing facilities disappear. The paper also compares two different
liquidity supply policies and finds that the level of liquidity necessary
to keep the rates on target depends on not only the aggregate but also
assets values of individual banks.
Keywords: Interbank market; interest rate volatility; central bank procedures; open market operations; (follow links to similar papers)
JEL-Codes: E43; E44; E52; (follow links to similar papers)
39 pages, June 12, 2006
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