Abstract
Implementation of monetary policy assumes that monetary policy instruments stabilize O/N interest rates to the proximity of main policy rate to archive monetary targets. The function of stabilizing mechanism is based on simple rule that the volume of liquidity in the banking system is held in line with the demand of banks for reserves. In this paper main factors of banking system liquidity are analyzed in the context of bank's imperfect intertemporal substitution of reserves and with respect to predictibility of O/N interest rates volatility. Analysis of O/N PRIBOR and CZEONIA reference interest rates prove Czech National Bank's ability to stabilise O/N interest rates disregard overall excess liquidity in the banking system. It also identified structural changes acting in the money market like reduced instability of demand for reserve and decreased volatility of O/N interest rates due to introduction of credit facility or increased volatility of the spread between O/N interest rates and repo rate due to reduction of frequency of repo tenders. Rapid increase in the volatility of differences between OMO target and bank's supply of excess reserves is also resulting in the weakening of a direct relationship between O/N PRIBOR dynamics and repo tenders.
Highlights
Karel BRŮNA*The present financial crisis confirms that central banks play a crucial role in the banking system liquidity management
Are the expectations of banks and central bank concerning the level of excess reserves, AFtD,e and AFtS,e are the expectations of banks and central bank concerning the influence of autonomous factors, OMOt−k is the volume of the open market operations with k-day maturity, the maturity of which falls on actual day, α (α > 0) is the parameter of the sensitivity of demand for reserves to the change in the spread between O/N interest rate and effective main policy
In the present concept of monetary policy implementation central banks believe that a mechanism stabilising O/N interest rates in the proximity of main policy rate is the basic prerequisite to achieve set monetary targets
Summary
The present financial crisis confirms that central banks play a crucial role in the banking system liquidity management. The practical liquidity management has to be consistent with the level of the main policy rate that is announced by central banks with regard to defined inflation target and expected dynamics of inflationary factors. The banking system in the Czech Republic works with liquidity surplus and so CNB has to withdraw excess liquidity from the banking system regularly. The objective of this paper is to define theoretically the basic problems of the banking system liquidity management in the context of monetary policy implementation and with regard to the dynamics of O/N interest rates. The goal of an empirical analysis is the practical application of these general principles on an example of implementation of the CNB strategy of inflation targeting, liquidity management in the situation of liquidity surplus in the Czech banking system and dynamics of reference interest rates in the Czech interbank market
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
