A Model of the Eurosystem’s Operational Framework and the Euro Overnight Interbank Market

44 Pages Posted: 10 Jul 2012

See all articles by Achim Hauck

Achim Hauck

University of Portsmouth

Ulrike Neyer

Heinrich-Heine-University Duesseldorf

Date Written: July 10, 2012

Abstract

This paper develops a theoretical model which replicates main features of the euro overnight interbank market and the Eurosystem’s operational framework, which has been in place since September 2008. Main ingredients of the model are frictions in the interbank market, a refinancing operation with unlimited liquidity supply and two standing facilities offered by the central bank. The model can explain several stylized facts observed during the financial crisis as the decline in interbank borrowing and the interbank rate, the increased borrowing from the Eurosystem and the strong recourse to its deposit facility. Furthermore, we discuss some policy implications.

Keywords: Liquidity, Monetary Policy Instruments, Interbank Market, Financial Crisis

JEL Classification: E52, E58, G01, G21

Suggested Citation

Hauck, Achim and Neyer, Ulrike, A Model of the Eurosystem’s Operational Framework and the Euro Overnight Interbank Market (July 10, 2012). Available at SSRN: https://ssrn.com/abstract=2103163 or http://dx.doi.org/10.2139/ssrn.2103163

Achim Hauck (Contact Author)

University of Portsmouth ( email )

Portsmouth Business School
Portsmouth
United Kingdom

HOME PAGE: http://www.port.ac.uk/economics-and-finance/staff/achim-hauck.html

Ulrike Neyer

Heinrich-Heine-University Duesseldorf ( email )

Department of Economics
Universitaetsstrasse 1
Duesseldorf, 40225
Germany

HOME PAGE: http://www.economics-neyer.uni-duesseldorf.de

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