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Demand For Reserves And The Central Bank's Management Of Interest Rates

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Executive Summary

The implementation of monetary policy is prevalently done by interest rate targeting with a short term market rate serving as operational target. The instruments for achieving the operational target are the provision of reserves and the interest rate charged in these transactions. This paper presents a model for the estimation of the demand curve for reserves, derived from the central bank's fixed rate tender auction and the interbank money market. Using data from Switzerland, the slope of the demand curve is estimated. Furthermore, properties of the demand curve such as the slope patterns in the course of a maintenance period and the slope in different monetary regimes are assessed.

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