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This article uses data from Jordan to show the importance of accounting for the level of Effective Excess Reserves (EER) when analysing the overnight interbank rate in emerging markets. Our econometric model quantifies the classic liquidity effect, uncovers a liquidity distribution effect on both sides of the market and shows that the magnitude of the three effects is a decreasing and convex function of the level of EER. The results provide evidence that the volatility of daily rate changes depends much more on the reserve surplus accumulated within a maintenance period than on the level of EER. The series of the central bank's daily forecast errors is used to identify the liquidity effect.
