Central Bank Liquidity Management and the Signal Extraction Problem on the Money Market / Die Liquiditätssteuerung der Notenbank und das Signal-extraktionsproblem am Geldmarkt

Bindseil Ulrich ()
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Bindseil Ulrich: Directorate General Operations, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2000, vol. 220, issue 3, 284-301

Abstract: Understanding the factors determining overnight rates is crucial both for central bankers and private market participants, since, assuming the validity of the expectation theory of the term structure of interest rates, expectations with regard to this “monadic” maturity should determine longer term rates, which are deemed to be relevant for the transmission of monetary policy. The note proposes a simple model of the money market within a two-day long reserve maintenance period to derive relationships between the relevant quantities, expectations concerning these quantities for the rest of the reserve maintenance period, and overnight rates. It is argued that a signal extraction problem faced by banks when observing quantities such as their aggregate reserve holdings and allotment amounts of monetary policy operations is at the core of these relationships. The usefulness of the model is illustrated by applying it to the analysis of three alternative liquidity management strategies of a central bank.

Keywords: Monetary policy instruments; money market; signal extraction; Geldpolitische Instrumente; Geldmarkt; Signalextraktion (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:220:y:2000:i:3:p:284-301

DOI: 10.1515/jbnst-2000-0303

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