Identifying the Effect of Bank of Japan's Liquidity Provision on the Year-End Premium: A Structural Approach

To what extent did the Bank of Japan's liquidity provisions reduce the premium on money market rates over the year-ends in Japan? To answer this question, we propose a simple structural model that illustrates the year-end operations and the year-end interbank money markets. Based on the structural model, we identify the effects of the year-end operations as differences between the actual premium in the year-end money market and the counterfactual premium without the operations, and decompose the effects into two factors: the amount of liquidity supplied and the steepness of the banks' liquidity demand curve. We find that the operations over the year-end and the fiscal year-end of 2008 had the largest effects among those from 2006 to 2008, reflecting the fact that the Bank of Japan had significantly expanded liquidity provisions in response to the decrease in market liquidity under the financial turmoil.