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Central Bank´s Foreign Exchange Reserves Accumulation and Dynamics of Banking System Liquidity Absorption: The Case of the Czech Republic, Poland and Hungary

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  • Karel Brůna
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    Abstract

    The paper deals with accumulation of foreign exchange reserves of central banks and its consequences in banking system liquidity management. In theoretical part the case of banking system liquidity surplus is analyzed focusing on creation of liquidity through FX operations, sterilization of liquidity and main sources of liquidity absorption. In this context it is analyzed how monetary policy instruments (on outright or repo basis) enable central bank to react on volatility of banking system liquidity needs and to cover issued currency in circulation and bank´s reserves by net foreign assets. In empirical part these problems are analyzed and compared using the example of the Czech Republic, Poland and Hungary. The paper focuses on main differences in the level of liquidity surplus, cost of sterilization, volatility of spread between O/N reference interest rate and main policy rate, main sources of liquidity absorption and dynamics of currency in circulation and reserves covering by net foreign assets.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2010 (2010)
    Issue (Month): 6 ()
    Pages: 723-746

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    Handle: RePEc:prg:jnlpol:v:2010:y:2010:i:6:id:759:p:723-746

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    Related research

    Keywords: open market operations; monetary policy implementation; liquidity; foreign reserves;

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    References

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    1. Peter Stella, 2002. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Working Papers 02/137, International Monetary Fund.
    2. Beck, Roland & Rahbari, Ebrahim, 2011. "Optimal reserve composition in the presence of sudden stops," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1107-1127, October.
    3. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
    4. Martin Cincibuch & Tomas Holub & Jaromir Hurnik, 2008. "Central Bank Losses and Economic Convergence," Working Papers 2008/3, Czech National Bank, Research Department.
    5. Alfred Broaddus, Jr. & Marvin Goodfriend, 2001. "What assets should the Federal Reserve buy?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 7-22.
    6. Alain Ize, 2005. "Capitalizing Central Banks," IMF Working Papers 05/15, International Monetary Fund.
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