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Modelling Short-Term Interest Rate Spreads In The Euro Money Market

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Executive Summary

In the framework of a new money market econometric model, the authors assess the degree of precision achieved by the European Central Bank ECB in meeting its operational target for the short-term interest rate and the impact of the U.S. sub-prime credit crisis on the euro money market during the second half of 2007. This is done in two steps. Firstly, the long-term behaviour of interest rates with one-week maturity is investigated by testing for co-breaking and for homogeneity of spreads against the Minimum Bid Rate (MBR, the key policy rate). Secondly, the impact of several shocks to the spreads is assessed by jointly modeling their behaviour.

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