Excess liquidity and the money market in the euro area

This paper assesses the impact of the fixed-rate full-allotment procedure implemented by the European Central Bank (ECB) in October 2008 on the functioning of the interbank money market. More specifically, our work examines whether the excess liquidity positions of financial institutions observed during the fixed-rate full-allotment period have altered the activity and the liquidity of the overnight segment of the euro area money market. In normal times, the limited amount of excess liquidity makes the dynamics of the money market insensitive to it. In contrast, the introduction of the fixed-rate full-allotment procedure – as one prominent unconventional measure of the ECB – has made the dynamics of the money market growingly dependent on the time-varying level of excess liquidity in the euro area.