Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153784
Authors: 
Bindseil, Ulrich
Jabłecki, Juliusz
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1350
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.
Subjects: 
liquidity management
money market
standing facilities
JEL: 
E4
E5
Document Type: 
Working Paper

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