The dynamic relationship between the Euro overnight rate, the ECB´s policy rate and the term spread

This paper investigates how the dynamic adjustment of the European overnight rate Eonia to the term spread and the ECB’s policy rate has been affected by rate expectations and the operational framework of the ECB. In line with recent evidence found for the US and Japan, the reaction of the Eonia to the term spread is non-symmetric. Moreover, the response of the Eonia to the policy rate depends on both, the repo auction format and the position of the Eonia in the ECB’s interest rate corridor. JEL - Klassifikation: E43 , E52Für viele Zentralbanken wie z.B. die Europäische Zentralbank (EZB) und die US-amerikanische Notenbank, ist der Interbankenmarkt für Tagesgeld der Haupttransmissionkanal ihrer geldpolitischen Maßnahmen. Der Zinssatz für Tagesgeld ist das operationelle Ziel der Geldpolitik, das die Zinsstrukturkurve verankert. Das Verständnis von Bestimmungsfaktoren und Dynamik des Tagesgeldsatzes ist daher von entscheidender Bedeutung für die effiziente Implementierung der Geldpolitik. Dieses Papier untersucht, wie die dynamische Anpassung des europäischen Zinssatzes für Tagesgeld, Eonia, an die Zinsstrukturkurve sowie an den Politikzins der EZB durch Zinsänderungserwartungen und den operationellen Rahmen der EZB beeinflußt wird. In unserem empirischen Ansatz zur Analyse der Dynamik des Eonia-Tagesgeldsatzes wird die Bedeutung von zwei separaten Beziehungen, die das Langfristverhalten des Eonia bestimmen, betont. Zum einen ist der Politikzins der Zentralbank eine wichtige Determinante des Niveaus des Tagesgeldsatzes. Dieser Politikzins ist definiert als der Reposatz aus den Hauptrefinanzierungsgeschäften der EZB. Zum anderen impliziert die Erwartungshypothese der Zinsstrukturkurve die Anpassung des Tagesgeldsatzes an einen längerfristigen Zinssatz. Unser empirischesModell beinhaltet beide Einflüsse und berücksichtigt dabei persistente Abweichungen zwischen Eonia und Politikzins am Ende der monatlichen Reservehaltungsperiode. Diese Abweichungen beruhen auf der kontraintuitiven Reaktion des Eonia auf Zinsänderungserwartungen, die jedoch durch den verzerrenden Einfluß erklärt werden kann, den das Unter- und Überbieten von Banken bei Offenmarktgeschäften vor der Reform der EZB im März 2004 auf den Interbankenmarkt ausgeübt hatte. Ähnlich wie das Zinsziel für die US-amerikanische Federal funds rate ist der Reposatz der EZB ein symmetrischer Politikzins. Im Gegensatz dazu ist zu erwarten, daß ein Mindestbietungssatz, wie er von der EZB seit Juni 2000 angewendet wird, vorrangig als untere Grenze für den Tagesgeldsatz wirkt. Darüberhinaus legt das Auftreten von Unter- und Überbietungsverhalten in den Hauptrefinanzierungsgeschäften der EZB nahe, daß auch die Richtung von Zinsänderungserwartungen die Entwicklung des Eonia bestimmt hat. Wir erweitern daher unseren Ansatz und modellieren eine nicht-symmetrische Anpassung des Eonia an beide Langfristbeziehungen. Dabei wird der potentielle Einfluß der Implementierung der Geldpolitik durch die EZB berücksichtigt. Insbesondere untersuchen wir, wie sich die Änderung im Auktionsverfahren der EZB im Juni 2000 auf die dynamische Anpassung des Eonia an seine langfristigen Bestimmungsfaktoren ausgewirkt hat. Unsere Ergebnisse zeigen, daß die Entwicklung des Eonia-Tagesgeldsatz innerhalb der monatlichen Reservehaltungsperiode vom Auktionsformat abhängt. Allerdings hat die Einführung des Zinstenders mit Mindestbietungssatz nicht zu einer geringeren Kontrolle uber den Eonia durch die EZB geführt. Eine asymmetrische Reaktion auf Zinsänderungserwartungen kann für die Eurozone unterstützt werden, obwohl diese zum Teil die Probleme des Unter- und Überbietens in den untersuchten Zeiträumen widerspiegeln dürfte

International investment positions and exchange rate dynamics : a dynamic panel analysis

In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks. JEL Classification: F31, F37, C2

The CFS international capital flow database: a user’s guide : [This Version: August 2007]

This paper documents the methodology underlying the construction of a global database of gross foreign asset and liability positions for 153 countries over the period 1970 to 2004 and illustrates some key data characteristics. The data cover both inflows and outflows of capital and thus allow for an assessment of the degree of international financial integration. In addition to net foreign asset stocks, we also provide details on the composition of the main asset and liability categories, namely the foreign direct investment, equity investment and debt components. Finally, we report on valuation changes as one of the main sources of discrepancy between transaction-based capital flow data and stock values of investment positions. The dataset is available for download at www.ifk-cfs.de/fileadmin/downloads/data/cfs-icfd.zip. or http://publikationen.ub.uni-frankfurt.de/volltexte/2007/4855/original/cfs-icfd.zip JEL Classification: F21; F34; F3

International investment positions and exchange rate dynamics: a dynamic panel analysis

In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country's international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country's net foreign asset to GDP position leads to a depreciation of that country's effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks. --Exchange Rate Determination,International Financial Integration,Dynamic Panel Data Models

The dynamic relationship between the Euro overnight rate, the ECB´s policy rate and the term spread

This paper investigates how the dynamic adjustment of the European overnight rate Eonia to the term spread and the ECB's policy rate has been affected by rate expectations and the operational framework of the ECB. In line with recent evidence found for the US and Japan, the reaction of the Eonia to the term spread is non-symmetric. Moreover, the response of the Eonia to the policy rate depends on both, the repo auction format and the position of the Eonia in the ECB's interest rate corridor. --Monetary Policy Implementation,Term Structure of Interest Rates,Nonlinear Cointegration

International Investment Positions and Exchange Rate Dynamics: A Dynamic Panel Analysis

In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks.exchange rate determination, international financial integration, dynamic panel data models

On the Degree of Homogeneity in Dynamic Heterogeneous Panel Data Models

We propose a semi-parametric approach to heterogeneous dynamic panel data modelling. The method generalizes existing approaches to model cross-section homogeneity within such panels. It allows for partial influence of other cross-section units on estimated coefficients, differentiating between short- run and long-run homogeneity, and determines the optimal degree of such homogeneity. The issue of cross-section homogeneity emerges as a special case of categorical conditioning. Applying our model to equilibrium exchange rate determination in a cross-country panel, we find evidence of largely heterogeneous adjustment and more homogeneous long-run coefficients across countries. The coefficient heterogeneity appears largely idiosyncratic and is not captured by simple categorizations like exchange rate regime classification

Interest Rate Dynamics and Monetary Policy Implementation in Switzerland

The maturity of the operational target of monetary policy is a distinguishing feature of the SNB's operational framework of monetary policy. While most central banks use targets for the overnight rate to signal the policy-intended interest rate level, the SNB announces a target range for the three-month Libor. This paper investigates the working and the consequences of the SNB's unique operational framework for the behavior of Swiss money market rates before and during the financial crisis.Implementation of Monetary Policy, Operational Targets of Monetary Policy, Three-Month Rate Targeting, Financial Crisis

International Investment Positions and Exchange Rate Dynamics

We revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we make use of a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long- run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country's international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions; furthermore, long-run exchange rate equilibria may have little relation to purchasing power parity outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality

a Conditional GVAR Approach

We examine the effects of increased international integration of both goods and financial markets on business cycle dynamics. To do so, we develop a new econometric framework for modelling cross-country spillovers in which the magnitude of these spillovers is an empirically determined function of the degree of a country's integration with international goods and financial markets. Our results suggest that the magnitude of cross-country spillovers for most country pairs has been increasing with strengthened goods and financial markets integration