Estimating the money market microstructure with negative and zero interest rates

Edoardo Rainone and Francesco Vacirca ()
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Francesco Vacirca: ECB and Bank of Italy

No 1059, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Money market microstructure is fundamental to studying bank behaviour, to evaluating monetary policy and to assessing the financial stability of the system. Given the lack of granular data on interbank loans, Furfine (1999) proposed an algorithm to estimate the microstructure using data from the payment system. We propose an econometric methodology to assess and improve the quality of the money market microstructure estimated by the Furfine algorithm in the presence of zero and negative rates, exploiting information coming from market regularities. We first extend the standard Furfine algorithm to include negative rates and verify the presence of significant noise at a specific rate. Secondly, we propose an inferential procedure that enriches and corrects the standard algorithm based on the economic likelihood of loans. Market regularities observed in this decentralized market are used to increase the reliability of the estimated interbank network. Thirdly, the methodology is applied to TARGET2, the European wholesale payment system. The main impacts of recent monetary policy decisions on key interest rates are studied, comparing the standard algorithm with the new econometric procedure.

Keywords: interbank markets; money; payment systems; trading networks; measurement error (search for similar items in EconPapers)
JEL-codes: C21 D40 E40 E52 G21 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-mst
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Citations: View citations in EconPapers (4)

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Journal Article: Estimating the money market microstructure with negative and zero interest rates (2020)
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