A model of the Eurosystem's operational framework and the euro overnight interbank market

Achim Hauck, Ulrike Neyer

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    Abstract

    This paper develops a theoretical model which replicates main institutional 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 form of participation costs 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.
    Original languageEnglish
    Pages (from-to)S65-S82
    JournalEuropean Journal of Political Economy
    Volume34
    Issue numberSupplement
    Early online date27 Jul 2013
    DOIs
    Publication statusPublished - Jun 2014

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