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The Liquidity and Liquidity Distribution Effects in Emerging Markets

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  • Jérôme Vandenbussche
  • Stanley Watt
  • Szabolcs Blazsek

Abstract

This paper analyzes the determinants of daily changes in Jordan''s interbank market overnight rate. It not only quantifies the classic liquidity effect, but also uncovers a liquidity distribution effect on both sides of the market, and shows that their magnitude is a decreasing and convex function of the level of excess reserves. It finds that the volatility of rate changes depends much more on the reserve surplus accumulated within a maintenance period than on the level of excess reserves. As Carpenter and Demiralp (2006), it uses the series of the central bank''s daily forecast errors to identify the liquidity effect.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/228.

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Length: 25
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/228

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Keywords: Monetary operations; Banking systems; Excess liquidity; Liquidity management; Money markets; Reserve requirements; banking; central bank; banking system; interbank market; money market; open market operations; monetary fund; monetary policy implementation; monetary policy; reserve requirement; monetary framework; bank data; segmentation; bank reserves; open market operation; money supply; monetary independence; demand for money; domestic money market; bank intervention; bank reserve; bank operations; government securities; reserve surplus; banking sector;

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  1. Prati, Alessandro & Bartolini, Leonardo & Bertola, Giuseppe, 2003. "The overnight interbank market: Evidence from the G-7 and the Euro zone," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(10), pages 2045-2083, October.
  2. Seth Carpenter & Selva Demiralp, 2004. "The liquidity effect in the federal funds market: evidence from daily open market operations," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-61, Board of Governors of the Federal Reserve System (U.S.).
  3. Gaspar, Vítor & Pérez-Quirós, Gabriel & Rodriguez, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4516, C.E.P.R. Discussion Papers.
  4. Uesugi, Iichiro, 2002. "Measuring the Liquidity Effect: The Case of Japan," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 289-316, September.
  5. Paolo Angelini, 2008. "Liquidity And Announcement Effects In The Euro Area," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 67(1), pages 1-20, March.
  6. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  7. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series, European Central Bank 0393, European Central Bank.
  8. M. Karanasos & J. Kim, 2003. "Moments of the ARMA--EGARCH model," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 6(1), pages 146-166, 06.
  9. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  10. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers, University of Connecticut, Department of Economics 2006-19, University of Connecticut, Department of Economics.
  11. He, Changli & Ter svirta, Timo & Malmsten, Hans, 2002. "Moment Structure Of A Family Of First-Order Exponential Garch Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(04), pages 868-885, August.
  12. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series, European Central Bank 0044, European Central Bank.
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