Abstract
Summary The implementation of monetary policy is prevalently done by interest rate targeting with a short term market rate serving as operational target. The instruments for achieving the operational target are the provision of reserves and the interest rate charged in these transactions. This paper presents a model for the estimation of the demand curve for reserves, derived from the central bank’s fixed rate tender auction and the interbank money market. Using data from Switzerland, the slope of the demand curve is estimated. Furthermore, properties of the demand curve such as the slope patterns in the course of a maintenance period and the slope in different monetary regimes are assessed. We find a steeper demand curve towards the end of the maintenance period and an increasing slope when the general interest rate level is high. Further, we investigate the role of the Swiss National Bank’s (SNB) interest rate in the fixed rate tender auctions. There is evidence that the SNB uses its auction rate to guide the interbank market rate.
Highlights
Most central banks are nowadays committed to price stability
The implementation of monetary policy is prevalently done by management of an interest rate, with a short term market rate serving as operational target
Inappropriate provision of reserves, which in turn causes a deviation of the market interest rate from the desired level of interest rate
Summary
Most central banks are nowadays committed to price stability. The implementation of monetary policy is prevalently done by management of an interest rate, with a short term market rate serving as operational target. Because of bidding dynamics in fixed rate tender auctions with no full allotment, the true demand for reserves is not directly observable for the central bank.. Because of bidding dynamics in fixed rate tender auctions with no full allotment, the true demand for reserves is not directly observable for the central bank.1 It has to estimate the true demand for reserves. If the central bank’s estimation misses the true demand, the resulting interest rate on the interbank market will deviate from the desired level of interest rate. This paper contributes to the existing literature by providing an empirical estimation of a demand curve for reserves in a fixed rate tender auction framework. The last section provides a discussion and some concluding remarks
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