The impact of the 2004 reform of the operational framework of the ECB : structural GARCH evidence

We investigate the money-market impact of the reform of the operational framework of the European Central Bank that took place in March 2004. We estimate a structural bivariate GARCH model with the overnight rate and 1-year swap rate, where identifying restrictions are imposed on the conditional variances. Differently from previous studies, we use a measure of structural correlation to study the linkages between the short end and the longer end of the term structure of money market swaps. Our results indicate that the 1-year swap segment has decoupled from the overnight rate as the two rates do not co-vary any longer.