Money market rate stabilization systems over the last 20 years: the role of the minimum reserve requirement

Patrizia Ceccacci (), Barbara Mazzetta (), Stefano Nobili (), Filippo Perazzoli () and Mattia Persico ()
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Patrizia Ceccacci: Bank of Italy
Barbara Mazzetta: Bank of Italy
Stefano Nobili: Bank of Italy
Filippo Perazzoli: Bank of Italy
Mattia Persico: Bank of Italy

No 46, Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) from Bank of Italy, Directorate General for Markets and Payment System

Abstract: The paper analyses the Eurosystem’s minimum reserve requirement system with averaging provision and compares it with the mechanisms for stabilizing money market rates adopted by other central banks (such as minimum reserves with carry-over provision, voluntary reserves with compliance bands and the quota system). The effectiveness of different approaches to stabilizing money market interest rates is then empirically investigated using data from nine central banks over the time period 2002-22. The results show that in corridor systems with scarce or no liquidity surplus, all the mechanisms examined contributed to stabilizing money market rates, although not all mechanisms proved equally effective. In floor systems with ample excess liquidity, these mechanisms would not be needed, since central banks can control the stance by adjusting the policy rate at which reserves are remunerated. However, the minimum reserve mechanism could also be used in floor systems to rapidly adjust the structural amount of liquidity in the system and as a benchmark when tiered reserve remuneration schemes are adopted.

Keywords: central bank reserves; minimum reserve requirement; money markets rates; monetary policy (search for similar items in EconPapers)
JEL-codes: E41 E43 E51 E52 E58 (search for similar items in EconPapers)
Date: 2024-03
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wpmisp:mip_046_24

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