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Interbank market under the currency board: Case of Lithuania

Author

Listed:
  • Marius Jurgilas

    (Economics University of Connecticut)

Abstract

This paper studies the liquidity effect in the environment of a currency board. Under such an environment, the endogeneity issue common to other monetary regimes does not arise, thereby allowing for a straightforward analysis. Using daily data from the interbank market in Lithuania, we estimate the liquidity effect and show that, contrarily to the existent literature, overnight interest rates tend to fall at the end of reserve holding period while being higher at the beginning. Thus the martingale hypothesis of the interest rates is rejected. It is also shown that banks do not utilize aggregate liquidity information provided by the Central Bank of Lithuania due to the structural impediments of the market

Suggested Citation

  • Marius Jurgilas, 2005. "Interbank market under the currency board: Case of Lithuania," Computing in Economics and Finance 2005 448, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:448
    as

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    File URL: http://sp.uconn.edu/~maj01004/Files/interbank%20market.pdf
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    References listed on IDEAS

    as
    1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    2. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
    3. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank.
    4. Malmsten, Hans, 2004. "Evaluating exponential GARCH models," SSE/EFI Working Paper Series in Economics and Finance 564, Stockholm School of Economics, revised 03 Sep 2004.
    5. Gaspar, Vitor & Pérez-Quirós, Gabriel & Rodriguez Mendizabal, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers.
    6. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, "undated". "Liquidity, Information, and the Overnight Rate," IEW - Working Papers 186, Institute for Empirical Research in Economics - University of Zurich.
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    Cited by:

    1. Marius Jurgilas, 2007. "Monetary Policy Under a Currency Board," Working papers 2007-34, University of Connecticut, Department of Economics.

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    More about this item

    Keywords

    interbank market; liquidity effect; currency board; Lithuania;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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