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

Achim Hauck; Ulrike Neyer

doi:10.1016/j.ejpoleco.2013.06.010

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 language	English
Pages (from-to)	S65-S82
Journal	European Journal of Political Economy
Volume	34
Issue number	Supplement
Early online date	27 Jul 2013
DOIs	https://doi.org/10.1016/j.ejpoleco.2013.06.010
Publication status	Published - Jun 2014

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This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities
SDG 17 Partnerships for the Goals

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10.1016/j.ejpoleco.2013.06.010

HAUCK_2014_cright_EJPE_A model of the Eurosystem's operational framework
NOTICE: this is the author’s version of a work that was accepted for publication in European Journal of Political Economy. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Political Economy, 34, (2014), DOI: 10.1016/j.ejpoleco.2013.06.010
Accepted author manuscript (Post-print), 799 KB

http://www.sciencedirect.com/science/article/pii/S0176268013000517

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AB - 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.

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JO - European Journal of Political Economy

JF - European Journal of Political Economy

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

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