The Daily Market for Funds in Europe: What has Changed with the EMU?

• Authors: Gabriel Pérez-Quirós and Hugo Rodríguez Mendizábal.
• BSE Working Paper: 112291 | September 15
• Keywords: Overnight Rates , reserve demand , martingale hypothesis
• JEL codes: E44, E52
• Overnight Rates
• reserve demand
• martingale hypothesis

This paper presents evidence that the existence of deposit and lending facilities combined with an averaging provision for the reserve requirement are powerful tools to stabilize the overnight rate. We reach this conclusion by comparing the behavior of this rate in Germany before and after the start of the EMU. The analysis of the German experience is useful because it allows to isolate the effects on the overnight rate of these particular instruments of monetary policy. To show that this outcome is a general conclusion and not a particular result of the German market, we develop a theoretical model of reserve management which is able to reproduce our empirical findings.