Excess liquidity and the foreign currency constraint: the case of monetary management in Guyana
AbstractThis article examines why commercial banks in Guyana demand nonremunerated excess reserves, a phenomenon that became even more widespread after financial liberalization. Despite the removal of capital controls, banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves. The findings suggest that commercial banks do not demand excess reserves for precautionary purpose-which is the conclusion of several other studies-but rather because of the maintained constraint. The estimated sterilization coefficient is consistent with the hypothesis of an enforced constraint. The results, moreover, suggest an alternative way of looking at the monetary transmission mechanism in developing countries. The central bank maintains price and exchange rate stability through the accumulation of foreign reserves.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics.
Volume (Year): 41 (2009)
Issue (Month): 16 ()
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Web page: http://www.tandfonline.com/RAEC20
Other versions of this item:
- Khemraj, Tarron, 2008. "Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana," MPRA Paper 53127, University Library of Munich, Germany.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F31 - International Economics - - International Finance - - - Foreign Exchange
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