Money Market Interest Rates Research Articles

Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework

AbstractAt the beginning of 2004, the Eurosystem implemented several modifications of its operational framework and liquidity management aiming at enhancing market efficiency. The purpose of this article is to study the effects of theses changes in the spread between the Eonia and the minimum bid rate. Our results reflect that both the operational changes as well as the new liquidity management are responsible for a significant decrease in the interest rate volatility. Copyright © 2009 John Wiley & Sons, Ltd.

VAR-Ing Monetary Policy in Poland

The paper makes an attempt to estimate the effects of monetary policy shocks on the economy. We estimate four variables VAR system with industrial production, CPI, money market rate and exchange rate. Two policy indicators: money market interest rate and exchange rate are assumed to be contemporaneously influenced by monetary policy shocks. The identification of the shocks is obtained by assigning weights to these two variables in the short run monetary condition index. The response functions generated by the small VAR system have reasonable shapes and economic interpretations: monetary policy shock seems to affect inflation and output relatively quickly. Granger causality tests reveals that although money market rate has limited predictive power in forecasting industrial production and CPI, the predictive power of exchange rate is very significant for the CPI. Decomposition of variance of the forecasted variables is consistent with these results: monetary policy shocks have significant contribution to the forecast variance of CPI.

Comovements in volatility in the euro money market

This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main findings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series. Secondly, there is evidence of fractional cointegration relationships relating all series, except the overnight rate. The common long memory factor analysis points to a two-factor volatility curve. The most important factor, in terms of proportion of total variance explained, can be interpreted as a level factor (64% of total variance), while the other as a slope factor (13% of total variance). Impulse response analysis and forecast error variance decomposition finally point to non significant forward transmission of liquidity shocks.

The Impact of Discount Rate Changes on Equity Markets

Previous studies of the market reaction to changes in the central bank discount rate have examined the dependence of such changes on known data such as pre-existing money market conditions. This had led to various alternative adjustments designed to extract the purely unexpected component of discount rate changes which alone are expected to elicit a market reaction upon realization. In this study, we challenge that view, maintaining instead that the existence of systematic causality in one direction will elicit an equity market reaction to unexpected changs when the direction of causality goes from discount rate changes to subsequent money market interest rates, and no reaction when the direction of causality goes predominantly from prior interest rate changes to discount rate changes. The statistical results from tests for each of the G-7 countries support our maintained hypothesis, without exception.

Extracting Market Expectations from Yield Curves Augmented by Money Market Interest Rates: The Case of Japan

This paper attempts to extract market expectations about the Japanese economy and the BOJ's policy stance from the yen yield curves augmented by money market interest rates, during the period from the end of the quantitative easing policy in March 2006. We use (i) the swap yield curves augmented by OIS interest rates (OIS/Swap), and (ii) the JGB yield curve augmented by FB/TB interest rates. First, using the Nelson-Siegel [1987] model, we estimate three latent dynamic factors, which can be interpreted as reflecting market expectations. Second, we investigate the relative importance of price discovery for each factor between OIS/Swap and FBTB/JGB, and find that the former has a more dominant role of price discovery for all factors. Third, we estimate the efficient price for each factor common to both yield curves using a time-series structural model, which enables us to decompose each factor into the efficient price and idiosyncratic factor.

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Volatility in the Euro area money market: effects from the monetary policy operational framework

AbstractThis paper deals with the evolution of the realized volatility of the overnight interest rates in the Euro area money market using intraday data. It analyses in particular the pattern of the volatility of the overnight interest rate before and after the introduction of the structural changes to the Eurosystem's operational framework in March 2004. Using univariate and multivariate regressions, the results suggest that the level of the volatility of the overnight interest rate has significantly decreased after March 2004, whereas the sensitivity of the overnight interest rate has increased, especially over the last days of the reserve maintenance periods. Moreover, there is no evidence according to which the volatility of the overnight interest rate is transmitted to the volatility of money market interest rates at longer maturities. Copyright © 2007 John Wiley & Sons, Ltd.

Money Market Volatility − A Simulation Study

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 liquidity 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.

Euler equations and money market interest rates: A challenge for monetary policy models

Standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption Euler equation. We use U.S. data to calculate the interest rates implied by Euler equations derived from a number of specifications of household preferences. Correlations between these Euler equation rates and the Federal Funds rate are generally negative. Regression results and impulse response functions imply that the spreads between the Euler equation rates and the Federal Funds rate are systematically linked to the stance of monetary policy. Our findings pose a fundamental challenge for models that equate the two.

Euro Money Market Interest Rates Dynamics and Volatility: How They Respond to Recent Changes in the Operational Framework

At the beginning of 2004, the Eurosystem implemented several modifications of its operational framework and liquidity management aiming at enhancing market efficiency. The purpose of this article is to study the effects of theses changes in the spread between the Eonia and the minimum bid rate. Our results reflect that both the operational changes as well as the new liquidity management are responsible for a significant decrease in the interest rate volatility.

Cílování krátkodobých úrokových sazeb pohledem Glenna Rudebusche

Článek se zabývá studií G. Rudebusche Federal Reserve Interest Rate Targeting, Rational Expectations and the Term Structure publikovanou v Journal of Monetary Economics v roce 1995. V práci definuji základní východiska studie, diskutuji nejdůležitější části Rudebuschovy práce a prezentuji klíčové závěry o vlivu centrální banky na dynamiku úrokových sazeb na peněžním trhu. Kromě toho poukazuji na některé problémy, které mohou ovlivnit porozumění chování úrokových sazeb. Jako první se jedná o problém nestability období, v rámci kterého je možné správně predikovat velikost hodnoty cílované úrokové sazby. Dále upozorňuji na některé technické aspekty provádění operací na volném trhu a v neposlední řadě zdůrazňuji problémy s potenciální nestabilitou termínové prémie.

Interest Rate Pass-Through: Empirical Results for the Euro Area

AbstractThis paper empirically examines the interest rate pass-through at the euro area level. The focus is on the pass-through of official interest rates, approximated by the overnight interest rate, to longer-term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error-correction and vector autoregressive model, suggest that the pass-through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass-through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass-through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub-sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass-through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations.

Is the MPC's Voting Record Informative about Future UK Monetary Policy?

AbstractIt is shown that the voting record of the Monetary Policy Committee of the Bank of England helps predict future policy rate changes. This result is robust to the inclusion of market participants’ expectations as measured by the slope of the term structure of money market rates and interest rate futures. Moreover, expectations seem to adjust to the information contained in the voting record, which suggests that publishing the minutes of MPC meetings increases the transparency of monetary policy.

The Euribor Futures Market: Efficiency and the Impact of ECB Policy Announcements

AbstractFor an effective and smooth monetary policy, it is important that interest rate expectations are in line with central bank policy intentions. The predictability of money market interest rates is, therefore, an indicator of transparency and clarity in the communication of monetary policy and of the effectiveness of monetary policy implementation.In this paper, we analyse three aspects of the predictability of money market rates in the European Monetary Union (EMU). The first is the efficiency of the three‐month Euribor interest rate futures markets. The second aspect is the effect of ECB policy announcements on the volatility of Euribor futures rates, and the third aspect is the effect of ECB policy announcements on the prediction error contained in Euribor futures rates. We find that the new Euro money markets were able to predict short‐term rates well. Our results suggest that the ECB communication of monetary policy has worked well during the first years of EMU and that the predictability of ECB policy decisions seems to have improved over time. ECB Council decisions still cause some surprises, but their effect on volatility is small.

Survey of recent developments

SUMMARYDespite a bomb attack in Jakarta in August, the main financial indicators of macroeconomic health have continued to improve. Inflation is much lower than in 2002, and the exchange rate has remained fairly stable. Public debt as a percentage of GDP continues to fall, and foreign exchange reserves to increase. Deposit and money market interest rates have declined further, although this has yet to translate into significantly lower lending rates. Share prices have also been increasing rapidly, and Moody's recently upgraded Indonesia's credit ratings. The markets responded calmly to the largely political decision to terminate the IMF program at the end of 2003, reassured by a relatively conservative budget for 2004, and by the articulation of a longer-term strategy of balancing the budget by 2005.

Money Stock, Monetary Base and Bank Behavior in Germany / Geldmenge, Geldbasis und Bankenverhalten in Deutschland

Summary This paper contributes to the analysis of the money supply process in Germany during the period of monetary targeting by the Bundesbank from 1975-1998. While the standard money multiplier approach assumes that the money stock is determined by the money multiplier and the monetary base it is argued here that both the money stock and the monetary base are determined endogenously by the optimizing behavior of commercial banks and private agents like households and firms. An industrial organization style model for the money creating sector that describes the money creation process is developed assuming that the main policy variable of the central bank is the money market interest rate. A vector error correction model for the nominal money stock, the monetary base, nominal income, short-term and long-term interest rates, and the required reserve rate is specified, and the interaction between these variables is analyzed empirically. The evidence contradicts the money multiplier approach and supports the presented model of the money creating sector.

Retail Bank Interest Rate Pass-Through: Is Chile Atypical?

This paper investigates empirically the pass-through of money market interest rates to retail banking interest rates in Chile, the United States, Canada, Australia, New Zealand, and five European countries. Overall, Chile's pass-through does not appear atypical. Based on a standard error-correction model, we find that, as in most countries considered, Chile's measured pass-through is incomplete. But Chile's pass-through is also faster than in many other countries considered and is comparable to that in the United States. While we find no significant evidence of asymmetry in Chile's pass-through across states of the interest rate or monetary policy cycle, we do find some evidence of parameter instability, around the time of the Asian and Russian crises. However, we do not find evidence that the switch to a more flexible exchange rate regime in 1999 and the nominalization of Chile's interest rate targets in 2001 have affected significantly the pass-through process.

Retail Bank Interest Rate Pass-Through: Is Chile Atypical?

This paper investigates empirically the pass-through of money market interest rates to retail banking interest rates in Chile, the United States, Canada, Australia, New Zealand, and five European countries. Overall, Chile’s pass-through does not appear atypical. Based on a standard errorcorrection model, we find that, as in most countries considered, Chile’s measured pass-through is incomplete. But Chile’s pass-through is also faster than in many other countries considered and is comparable to that in the United States. While we find no significant evidence of asymmetry in Chile’s pass-through across states of the interest rate or monetary policy cycle, we do find some evidence of parameter instability, around the time of the Asian and Russian crises. However, we do not find evidence that the switch to a more flexible exchange rate regime in 1999 and the “nominalization” of Chile’s interest rate targets in 2001 have affected significantly the pass-through process.

A behavioral analysis of interest rates in Euro area

Analyses the structural behaviour of money and capital market interest rates 1999‐2001 in the European Monetary Union. Finds that the positive correlations between interest rates of different time periods get stronger as the time periods get closer, derives the principal components which explain most of the variability and applies time series analysis to the model to produce forecasts which come very close to actual values. Develops a model of the Down Jones EURO STOXX financial sector index which also shows reliable forecasting power except for the Feb 2001 period when stock markets were “in turmoil”. Compares the returns for one‐month holdings of zero‐coupon European government bonds with different maturities for various return, risk and risk‐return measures; and finds that a one‐month holding of a two‐year bond is the best investment.

The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation

This article examines the dynamic relationship between two key US money market interest rates––the federal funds rate (FF) and the 3-month Treasury bill rate. Using daily data over the period from 1974 to 1999, we find a long-run relationship between these two rates that is remarkably stable across monetary policy regimes of interest rate and monetary aggregate targeting. Employing a nonlinear asymmetric vector equilibrium correction model, which is novel in this context, we find that most of the adjustment toward the long-run equilibrium occurs through the FF. In turn, there is strong evidence for the existence of significant asymmetries and nonlinearities in interest rate dynamics that have implications for the conventional view of interest rate behavior.