Research Discussion Paper – RDP 9214 The Cash Market in Australia


The cash market is the market for overnight loans between financial institutions. This market is central to the operation of Australia's financial system: it is there that banks seek to borrow or lend in response to short-term fluctuations in their liquidity, and where the Reserve Bank conducts the domestic market operations through which it controls monetary conditions and implements monetary policy changes.

This paper outlines a model of the cash market in Australia, which incorporates recent changes in the operating procedures followed by the Reserve Bank. The paper shows how the dynamics of the cash market depend on the presence of both same-day and next-day settlement in the cash market, and how the various interest rates on overnight loans (“cash rates”) are determined.

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