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Norwegian interbank market’s response to changes in liquidity policy

Qaisar Akram and Jon H. Findreng

No 2017/7, Working Paper from Norges Bank

Abstract: We investigate pricing and activity in the Norwegian unsecured overnight interbank market in response to a shift in the central bank's liquidity policy. In october 2011, to encourage interbank trading, banks were allotted quotas for their overnight deposits with remuneration at the key policy rate while that on overnight deposits beyond allotted quotas was set one percentage point lower. In addition, a target range for banks' total overnight deposits was introduced and supported by open market operations to counteract not only temporary liquidity shortfalls, but also surpluses. We document substantially higher interbank trading, lower interbank interest rates relative to the policy rate as well as lower interest rate volatility following the policy shift. Notably, while overnight interbank interest rates were generally above the key policy rate before the policy shift, they have been close to but generally below the key policy rate afterwards.

Keywords: Overnight interbank market; liquidity policy; regime-switching models (search for similar items in EconPapers)
JEL-codes: E43 E58 G21 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017-04-19
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2017_07

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