The Role of Central Bank in Competitive Environment: A Study for Interest Rate Corridor Systems

General Information About Interest Rate Corridor System

Since the intraday transactions in the interbank market are uncertain, the reserve requirement of each bank at the end of the day is uncertain. For example, a bank with a surplus liquidity surplus may deposit deposits to the central bank in order to assess this surplus, while a bank with temporary liquidity shortage may benefit from the short-term credit facilities of the central bank (Whitesell, 2006).

In the corridor systems, a central bank provides two facilities, namely the possibility of lending to commercial banks provided that they pay a certain interest, and the possibility of deposit income in exchange for a deposit interest. While the central banks implement a corridor policy, the overnight market interest rate in the money market can be determined in close proximity to the targeted interest rate (Berentsen and Monnet, 2008).

In a classical corridor system, the policy rate of the central bank will be below the lending rate and above the deposit rate. Therefore, the lending rate constitutes an upper limit for short-term interest rates. (Revised Framework Monetary Operations, 2016). In corridor systems, there are two types of applications: interest rate corridor system and floor system. Below it will be given information about these systems.