Does anybody know any paper about the effects of the amount of Central Bank lending on interbank rate? I´m trying to study for an optimal amount that a Central Bank can lend to banks (Repos, standing facilities,...) without deviate the interbank rate (or the target rate) from the policy rate.
Interbank interest rate effect to the components of credit risk including:
- Libor vs. OIS spread;
- The shape of the yield curve;
- Pricing of the financial derivatives;
- Absolute level of the yield curve…
It depends on the theory you use. When a central bank expands base money it is supposed to have a liquidity effect. If central bank targets a benchmark rate and wants to reduce rate, then it has to make money cheap by injecting liquidity. If it wants to increase the rate it has to drain liquidity from the banking system otherwise the liquidity effect impedes the interest rate target. Also, "open mouth" operations often works in the short run to affect the benchmark policy rate. However, in the long run the monetary authority has to manage liquidities consistent with its interest rate target. I've observed these liquidity effects for a cross section of countries.
I am also interested to do the same process in Indian scenario (with RBI lending rate and Inter-bank rates). Optimization could be done through Linear (programming) equation. Just we have to find and extract the information of prevailing and historical lending rate; Commercial bank rates; Reverse Repo Rates; Inflation/Deflation rate; etc and getting into an equation for optimization.
If we want the same in amount we can calculate it through the interest rates prevailing with appropriate amounts. I hope this answer would atleast fetch you with some meager information. Thank you.
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