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' liquidity

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