Central Banking

Explaining interest-rate spreads

This paper uses a time series econometric framework to determine the structural determinants of the spread between the European Overnight Rate and the European Central Bank's Policy Rate from mid-2004 to mid-2006.

The start date of the series was chosen to coincide with the introduction of a new framework for monetary operations.

The authors attribute the "largest part" of the spread to the current liquidity deficits. "Moreover, tight liquidity conditions as well as an increase in banks'

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