Gradualism, Transparency and the Improved Operational Framework: A Look at Overnight Volatility Transmission<sup>*</sup>

Colarossi, Silvio; Zaghini, Andrea

doi:10.1111/j.1468-2362.2009.01241.x

Cited by 192 publications

(9 citation statements)

References 40 publications

(54 reference statements)

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“…For example, Nautz and Offermanns (2008) show that the volatility of the overnight rate has been reduced significantly under the new framework. Colarossi and Zaghini (2007) find that the ECB's reform even has affected the transmission of overnight rate volatility to longer-term rates. Focusing on the persistence of policy spreads, we investigate the consequences of the ECB's new operational framework from a different perspective.…”

Section: Monetary Policy Implementation and The Persistence Of Policymentioning

confidence: 89%

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

Busch

Nautz

2010

German Economic Review

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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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Section: Monetary Policy Implementation and The Persistence Of Policymentioning

confidence: 89%

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

Busch

Nautz

2010

German Economic Review

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“…First, there is a growing empirical literature on the dynamics and the volatility of overnight rates. Recent examples include Bartolini and Prati (2006), Pérez Quirós and Rodríguez Mendizábal (2006), Colarossi and Zaghini (2009), and Nautz and Scheithauer (2011. All these contributions investigate how distinguishing features of the central bank's operational framework influence the behavior of overnight rates.…”

Section: List Of Tablesmentioning

confidence: 99%

Monetary transmission right from the start: On the information content of the Eurosystem's main refinancing operations

Abbassi¹,

Nautz²

2012

The North American Journal of Economics and Finance

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The Eurosystem's main refinancing operations (MRO) are key for the interbank money market and the monetary transmission process in the euro area. This paper investigates how money market rates respond to the information revealed by various aspects of an MRO auction outcome. Our results confirm that the level of MRO rates governed short-term money market rates before the financial crisis. Since the start of the financial crisis, however, the information content of MRO rates has changed. While the levels of MRO rates have lost much of their pre-crisis significance, the spread between the weighted average and the marginal MRO rate has become an important barometer for the actual situation in the money market during the crisis.Keywords: Monetary Policy Implementation; Central bank auctions; European Central Bank; Money markets and Financial Crisis; JEL classification: E43; E52; E58; D44 Non-technical SummaryThe relation between the Eurosystem's main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. The liquidity supply through MROs should ensure that short-term money market rates closely follow the MRO rates and that their volatility remains well contained. This central aim of monetary policy implementation has never been an easy task. Even before the financial crisis, a puzzling and unintended upward trend in the spread between the European overnight rate (Eonia) and the MRO rates indicated that the monetary transmission mechanism is not sufficiently understood. Since the start of the financial crisis, spreads between the ECB's main refinancing rates and the money market rates have been huge and persistent. In order to shed more light on the very beginning of the monetary transmission process in the euro area, this paper investigated how money market rates respond to new information revealed by an MRO auction outcome before and during the financial crisis.Our results show that the financial crisis changed the information content of MRO auctions in two important ways. First, we find that the information contained in the levels of the MRO rates has significantly declined since the outbreak of the crisis in

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“…In order to capture probably important long-run equilibrium relations governing the federal funds rate dynamics, we specify the mean equation of the EGARCH model as an error correction equation where 1 See Bindseil and Nyborg (2007) for a recent overview of central banks' monetary implementation. 2 A notable exception is Colarossi and Zaghini (2007) who argue that the improved communication of the Fed ameliorated the transmission of overnight rate volatility to longer term interest rates. the federal funds rate adjusts to two interest rate spreads.…”

Section: Non-technical Summarymentioning

confidence: 99%

Monetary policy implementation and the federal funds rate

Nautz¹,

Schmidt

2009

Journal of Banking & Finance

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08025.pdf By contrast, the declining trend in required reserves has increased interest rate volatility in the U.S. Paying interest on reserves as it is planned from 2011 onwards shall broaden the reserve base and consequently increase reserve requirements. As a consequence, our empirical findings suggest that the planned introduction of remunerated reserves will decrease the volatility of the federal funds rate in a significant way. Abstract This paper investigates how the implementation of monetary policy affects the dynamics and the volatility of the federal funds rate. Since the early 1980s, the most important changes in the Fed's conduct of monetary policy refer to the role of the federal funds rate target and the reserve requirement system. We show that the improved communication and transparency regarding the federal funds rate target has significantly increased the Fed's influence on the federal funds rate since 1994. By contrast, the declining role of required reserves in the U.S. has contributed to higher federal funds rate volatility. Our results suggest that the planned introduction of remunerated reserves will further enhance the controllability of the federal funds rate. Non-Technical SummaryKeywords: Dynamics and Volatility of the Federal Funds Rate, Monetary Policy Implementation, Central Bank Communication, Reserve Requirements JEL classification: E43, E52, C22 * We thank Jan Scheithauer for helpful comments and suggestions. Financial support by the Deutsche Forschungsgemeinschaft (DFG) through NA-385/4-1 is gratefully acknowledged.

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Gradualism, Transparency and the Improved Operational Framework: A Look at Overnight Volatility Transmission^*

Cited by 192 publications

References 40 publications

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

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

Monetary transmission right from the start: On the information content of the Eurosystem's main refinancing operations

Monetary policy implementation and the federal funds rate

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Gradualism, Transparency and the Improved Operational Framework: A Look at Overnight Volatility Transmission*

Cited by 192 publications

References 40 publications

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

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

Monetary transmission right from the start: On the information content of the Eurosystem's main refinancing operations

Monetary policy implementation and the federal funds rate

Contact Info

Product

Resources

About

Gradualism, Transparency and the Improved Operational Framework: A Look at Overnight Volatility Transmission^*