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Interbank market under the currency board: Case of Lithuania

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  • 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

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 448.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:448

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Keywords: interbank market; liquidity effect; currency board; Lithuania;

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References

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  1. Vitor Gaspar & Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2004. "Interest Rate Determination in the Interbank Market," UFAE and IAE Working Papers 603.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 0393, European Central Bank.
  3. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
  4. Ewerhart, Christian & Cassola, Nuno & Ejerskov, Steen & Valla, Natacha, 2004. "Liquidity, information, and the overnight rate," Working Paper Series 0378, European Central Bank.
  5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  6. Malmsten, Hans, 2004. "Evaluating exponential GARCH models," Working Paper Series in Economics and Finance 564, Stockholm School of Economics, revised 03 Sep 2004.
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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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