Working Paper no. 116
By Nikolaos Panigirtzoglou, James Proudman and John Spicer
It is important for monetary policy makers to know how closely money market rates follow the policy rates they set. This paper looks at the volatility and persistence of divergences between short-term market interest rates away from policy rates. This may also offer insights into the effectiveness of various approaches that central banks employ to smooth interest rate volatility, such as requiring minimum reserves. Using data for Germany, Italy and the United Kingdom, we find that in all three countries there are significant temporary divergences, although the average divergence is close to zero.