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 e¤ects 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 …ndings.

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One of the most familiar empirical stylized facts about output dynamics in the United States is the positive autocorrelation of output growth. This paper shows that positive autocorrelation can be better captured by shifts between business cycle states rather than by the standard view of autoregressive coefficients. The result is extremely robust to different nonlinear alternative models and applies not only to output but also to the most relevant macroeconomic variables.

JEL classification: F31 F37 C01 C22 Keywords: Euro-dollar rate Exchange rate forecasting State-space model Mixed frequencies a b s t r a c tWe propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one-week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random-walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model obtains a great improvement when we use the direction of change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down, with statistically significant improvements.