A Model of the Eurosystem’s Operational Framework and the Euro Overnight Interbank Market
44 Pages Posted: 10 Jul 2012
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: Suggested Citation
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