A Simple Model of Interest Rates in the Croatian Money Market

1. A Simple Model of Interest Rates in the Croatian Money Market By Tomislav Galac, Lana Ivičić and Mirna Dumičić Discussant: Iftekhar Hasan Dubrovnik, June 27, 2007

2. Motivation • Money market is the place where central banks implement its monetary policy through their operations • Overnight money market rate may not be the most important rate for monetary policy transmission (Hartmann, Manna, Manzanares, 2001). However, understanding the function and operation framework is very important to the understanding of central bank implementation of monetary policy. • The literature on inter-bank fund market is quite large with the focus on US federal fund market. Relatively fewer papers looks at Euro money market, especially from the microstructure perspectives.

3. Research Questions • Main question • Using a microstructure approach, this paper intends to examine how institutional environment (changes) may impact the interest rate of overnight money market in Croatia. • Other objectives • Examining both the level and volatility of overnight interest rate and its determinant. • Develop a predictive model.

4. Data • Daily data from both organized market and OTC market • Daily data on realized interest rates and volumes in overnight trading in ZMM from 01/2001-02/2007 • Un-brokered inter bank market (IB) 09/2002-02/2007 • Other data sources are used to construct indicators of important event dates and structural variables

5. Key Results • Build a relatively parsimonious model that can explain over 40% of variability in daily change of the overnight interest rate in the inter-bank money market in Croatia. • Identify two structural variables and six calendar effects in the model.

6. Comments • A detailed description about the money market as well as institutional context of Croatian money market. • Provide some information to evaluate the features of Croatian money market and monetary policy setup.

7. Comments (cont’d) • Data limitation • As acknowledged by the authors, this paper aggregated daily data. • The overnight money market may not response to institutional environment (or change) at the same time interval.

8. Comments (cont’d) • The choice of model as well as inclusion and exclusion of variables in this paper need some justifications. • Predictive power • Informativeness • Testing for co-integration • Long term relationship or spurious correlation

9. Minor Suggestions • Tables in this paper need to be self-explained and referred accordingly. The interpretations of results were not so clear to the readers, and should base on empirical findings. • Discuss more about implications of this study

10. Other Suggestions (cont’d) • Distinguish itself from existing body of literature in order to highlight the contribution and new insights gained from this study. • Barucci, Emilio, Claudio Impenna and Roberto Reno (2003). "The Italian Overnight Market: Microstructure Effects, the Martingale Hypothesis and the Payment System." Working Paper. • Hartmann, Philipp, Michele Manna and Andres Manzanares (2001). "The microstructure of the euro money market." Journal of International Money and Finance 20: 895-948.

11. Future Research • Further explore the overnight interest rate of Croatian money market at different time intervals. • Examining how actually open market operations of CNB may impact the overnight money market. • Event Study!

12. Paper • What? • Why? • Where? • What Extent? (a) learning process! (b) something new! (c) academic (d) central banking (e) policy issue • Why Others will cite this paper?