The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management

Ulrich Bindseil and Juliusz Jabłecki ()

No 1350, Working Paper Series from European Central Bank

Abstract: Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. It is shown that the wider the corridor, the greater the interbank turnover, the leaner the central bank’s balance sheet (i.e. the lower the average recourse to standing facilities) and the greater short-term interest rate volatility. The obtained relationships are matched with central bank preferences to obtain an optimal corridor width. The model is tested against euro area and Hungarian daily data encompassing the financial crisis that began in 2007. JEL Classification: E4, E5

Keywords: liquidity management; money market; standing facilities (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
Note: 327704
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111350

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