The article talks about the impact of manipulation in the implementation of the monetary policy. The authors claim that as a result of the impulsive reactions to the fundamental index of interbank interest rates, manipulation has turned out to be a major challenge for the operational enactment of the monetary policy. Therefore, to address the issue, the authors have focused on a microstructure model whereby a commercial bank can have a strategic alternative to the standing facilities of the central bank. They typify equilibrium where market rates are positively manipulated. The findings of the study prove that manipulation can be lucrative for a commercial bank with appropriate ex-ante features. And so, manipulation will continue to be a characteristic of equilibrium albeit stakeholders in the derivatives market create rational prospects regarding potential manipulation. The authors conclude by recognizing that the monetary authority has controlling techniques to fight manipulation and that further vigilance is required to ascertain that there is no operational manipulation (Ewerhart, Cassola, Ejerskov, & Valla, 2007).
Key points
The principal ideas discussed in the article regarding manipulation in the money markets include:
• Manipulation is a potential concern in money markets, particularly when a commercial bank holds a profitable position in which it can gain from may be an increase in interest rates.
• From an operational viewpoint, manipulation can increase volatility to the immediate interest rate thereby complicating the liquidity control of both the central bank and the commercial banks.
• Manipulation can have an impact on the market's confidence during a smooth execution of monetary policy, which will in turn affect the long-term refinancing conditions thereby upsetting the effectiveness of the monetary policy.
• The decision to manipulate a market by a commercial bank is contingent on factors such as the bank's general trading and deposit capacities, its readiness to take premeditated measures in search of profitable frontiers as well as the internal distribution of its risk budget between money markets.
• Competition amongst potential manipulators cannot impede the likelihood of manipulation.
• The immediate reaction by the central bank can help in reducing the volatility in the money markets caused by manipulations.