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The day-to-day interbank market, volatility, and central bank intervention in a developing economy

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  • Sánchez-Fung, José R.

Abstract

This paper investigates banking system instability vis-à-vis the day-to-day interbank market and monetary policy effectiveness in the Dominican Republic. The analysis reveals a negative relationship among excess banking system reserves and the interbank interest rate, and shows that in crisis ‘news’ affect the interbank rate’s volatility asymmetrically and non-linearly. The paper also finds that the 2002-2003 banking crisis and the subsequent central bank intervention as a lender of last resort weakened monetary policy’s transmission mechanism. These events undermined the ensuing stabilization effort, stressing the pervasive short-run trade-off between preserving macroeconomic stability and safeguarding financial stability, and the pitfalls of monetary policymaking in a highly volatility setting.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15648.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:15648

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Keywords: interbank market; financial stability; monetary policy; IMF stabilisation programme; Dominican Republic.;

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