EconPapers    
Economics at your fingertips  
 

Modeling Short-Term Interest Rate Spreads in the Euro Money Market

Nuno Cassola and Claudio Morana
Additional contact information
Nuno Cassola: European Central Bank

International Journal of Central Banking, 2008, vol. 4, issue 4, 1-37

Abstract: In the framework of a new money-market econometric model, we assess the degree of precision achieved by the European Central Bank (ECB) in meeting its operational target for the short-term interest rate and the impact of the U.S. subprime credit crisis on the euro money market during the second half of 2007. This is done in two steps. Firstly, the long-term behavior of interest rates with one-week maturity is investigated by testing for cobreaking and for homogeneity of spreads against the minimum bid rate (MBR, the key policy rate). These tests capture the idea that successful steering of very short-term interest rates is inconsistent with the existence of more than one common trend driving the one-week interest rates and/or with nonstationarity of the spreads among interest rates of the same maturity (or measured against the MBR). Secondly, the impact of several shocks to the spreads (e.g., interest rate expectations, volumes of open-market operations, interest rate volatility, policy interventions, and credit risk) is assessed by jointly modeling their behavior. We show that after August 2007, euro-area commercial banks started paying a premium to participate in the ECB liquidity auctions. This puzzling phenomenon can be understood by the interplay between, on the one hand, adverse selection in the interbank market and, on the other hand, the broad range of collateral accepted by the ECB. We also show that after August 2007, the ECB steered the “risk-free” rate close to the policy rate, but has not fully offset the impact of the credit events on other money-market rates.

JEL-codes: C32 E43 E50 E58 G15 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.ijcb.org/journal/ijcb08q4a1.pdf (application/pdf)
http://www.ijcb.org/journal/ijcb08q4a1.htm (text/html)

Related works:
Working Paper: Modelling short-term interest rate spreads in the euro money market (2008) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2008:q:4:a:1

Access Statistics for this article

International Journal of Central Banking is currently edited by Loretta J. Mester

More articles in International Journal of Central Banking from International Journal of Central Banking
Bibliographic data for series maintained by Bank for International Settlements ().

 
Page updated 2025-03-22
Handle: RePEc:ijc:ijcjou:y:2008:q:4:a:1