Liquidity Shocks in the Eurosystem Interbank Market

The paper analyses the relationship between the liquidity shock variance and the size of the reserve requirement. I calibrated the key parameters of the model for the Eurosystem and found that the standard deviation of the shock is roughly 10% of the average bank's current account holding. Using these parameters and a standard interbank model, I was able to reproduce and explain the dual pattern of EONIA behaviour fairly well. In the early stage of the maintenance period, when the rate typically remains stable, it is the expectations that drive the rate, and the martingale hypothesis should hold while the liquidity effect is low. Toward the end of the maintenance period, it is the market liquidity that determines the interest rate behaviour.