Controllability and Persistence of Money Market Rates along the Yield Curve: Evidence from the Euro Area

Abstract

Controllability of longer-term interest rates requires that the persistence of their deviations from the central bank's policy rate (i.e. the policy spreads) remains sufficiently low. This paper applies fractional integration techniques to assess the persistence of policy spreads of euro area money market rates along the yield curve. Independently from anticipated policy rate changes, there is strong evidence for all maturities that policy spreads exhibit long memory. We show that recent changes in the operational framework and the communication strategy of the European Central Bank have significantly decreased the persistence of euro area policy spreads and, thus, have enhanced the central bank's influence on longer-term money market rates.Keywords: Long memory and fractional integration; controllability and persistence of interest rates; new operational framework of the ECB JEL classification: C22, E43, E52 * We thank

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“…* * * , * * , * indicate significance at the 1%, 5%, 10% level. With respect to the persistence in Euribor rates, we find that Euribor rates are characterized by a very "short memory" before the onset of the crisis, facilitating the ECB to effectively steer money market rates, compare Busch and Nautz (2010 …”

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“…Note that the outstanding volumes associated with the Eurosystem's open market operations are announced around 9:30 a. m. and hence known to the banks prior to the Euribor fixing.18 According toHassler and Nautz (2008) andBusch and Nautz (2010) controllability of money market rates requires sufficiently low persistence in changes in longer-term money market rates. If money market rates are too persistent, the lasting impact of shocks can impede the transparency of policy signals and the central bank's influence on money market rates along the yield curve.…”