The Bank of Italy today publishes 'Money market rate stabilization systems over the last 20 years: the role of the minimum reserve requirement', the new issue of the series 'Markets, infrastructures, payment systems'.
The paper analyses the Eurosystem's minimum reserve requirement system with averaging provision and compares it with the mechanisms for stabilizing money market rates adopted by other central banks (such as minimum reserves with carry-over provision, voluntary reserves with compliance bands and the quota system). The effectiveness of different approaches to stabilizing money market interest rates is then empirically investigated using data from nine central banks over the time period 2002-22.
The results show that in corridor systems with scarce or no liquidity surplus, all the mechanisms examined contributed to stabilizing money market rates, although not all mechanisms proved equally effective. In floor systems with ample excess liquidity, these mechanisms would not be needed, since central banks can control the stance by adjusting the policy rate at which reserves are remunerated. However, the minimum reserve mechanism could also be used in floor systems to rapidly adjust the structural amount of liquidity in the system and as a benchmark when tiered reserve remuneration schemes are adopted.
