Determinants of the Spread Between POLONIA Rate and the Reference Rate: Dynamic Model Averaging Approach

In the paper we consider the factors that determine the overnight interest rates in the Polish interbank market (measured by the POLONIA rate index). In 2008 the Polish central bank (NBP) adapted the policy similar to the European Central Bank (ECB) and since then it has been trying to place the POLONIA rate around the NBP reference rate, mainly by influencing the liquidity conditions through open market operations. We try to answer the question how effective this control was. We identify a set of factors that determine overnight rates, namely: liquidity, expectations, confidence in the banking sector and central bank operations. We analyze to what degree each of these factor has been influencing the POLONIA rate in the period from 2006 to 2016. To this end we have used a non-standard econometric method, namely dynamic model averaging, which allows to identify the set of variables that provide the best description of the explanatory variable. The results reveal that before the outbreak of financial crisis in 2008 the spread between POLONIA rate and reference rate could be explained mainly by liquidity conditions. After the crisis had begun, the importance of liquidity factor decreased and the expectations played a more important role in determining the spread. The liquidity situation has regained its importance in determining the spread since the beginning of 2012, after the central bank had undertook appropriate measures to normalize the situation on the interbank market.