Estimating the demand for settlement balances in the Canadian Large Value Transfer System: How much is too much?

Nellie (Yinan) Zhang

Canadian Journal of Economics, 2019, vol. 52, issue 2, 735-762

Abstract: This paper applies a static model of an interest rate corridor to the Canadian data and estimates the aggregate demand for central bank settlement balances in the Large Value Transfer System (LVTS). The analysis takes into account the downward divergence of the overnight interest rate from the target rate, which has been persistent since 2005. The results suggest that a target of $3,000,000,000 for LVTS settlement balances does not seem excessive during the time period when Canadian monetary policy was operating at the effective lower bound (ELB). In addition, the estimation shows that the point elasticity of overnight interest rate is around 0.17 in the ELB framework.

JEL-codes: G01 (search for similar items in EconPapers)
Date: 2019
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