Money market volatility: a simulation study

Michal Kempa

No 13/2006, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: 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.

Keywords: Interbank market; interest rate volatility; central bank procedures; open market operations (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2006_013

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