This paper analyses the liquidity effect in Norway by examining the
relationship between a range of liquidity variables and five
different measures of the short-term interbank premium. In a floor
system the key policy rate is equal to banks' deposit rate in the
central bank, and as such, this analysis provides new information
on the liquidity effect in a floor system. Both excess liquidity
(total central bank reserves in the banking system) and structural
liquidity (central bank reserves in the system before Norges Banks'
market operations) have, as expected, a negative a significant
effect on almost all dependent variables. Furthermore, in periods
of financial turmoil European and Norwegian banks may face higher
USD rates in the interbank market either because of a general USD
liquidity premium or an institution specific credit premium. My
analysis provides additional insight in the division between the
liquidity premium and the credit premium in a way, to my knowledge,
not done in earlier literature. The results indicate that during
the financial crisis (2007-2009) the liquidity premium dominated in
USD as the availability of credit deteriorated.
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