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Interbank Markets under Currency Boards

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  • Marius Jurgilas

    (University of Connecticut)

Abstract

This paper analyzes interbank markets under currency boards. Under such an environment, problematic endogeneity issues common to other monetary regimes do not arise. Using daily data from the interbank markets in Bulgaria and Lithuania we show, that contrary to the existing literature, overnight interest rates tend to decrease towards the end of the reserve holding period. Empirical results are supported by a finite horizon heterogeneous agents model showing that interest rates tend to decrease in the case of excess aggregate reserves in the banking system. Results contrast with Quir'os and Mendiz'abal (2006) who find that interest rates should be increasing regardless of the outstanding aggregate liquidity in the market. We also show that responsiveness of banks to interest rate changes diminishes as the end of reserve holding period approaches. Under certain circumstances this could lead to multiple equilibria with increasing or decreasing interest rates.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2006-19.

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Length: 30 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:uct:uconnp:2006-19

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Keywords: Interbank market; Currency board;

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References

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  1. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The Microstructure of the Euro Money Market," CEPR Discussion Papers 3081, C.E.P.R. Discussion Papers.
  2. Vítor Gaspar & Gabriel Pérez-Quirós & Hugo Rodríguez Mendizábal, 2004. "Interest rate determination in the interbank market," Banco de Espa�a Working Papers 0407, Banco de Espa�a.
  3. Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2003. "The daily market for funds in Europe: what has changed with the EMU," Banco de Espa�a Working Papers 0313, Banco de Espa�a.
  4. Jose-Victor Rios-Rull, 1997. "Computation of equilibria in heterogeneous agent models," Staff Report 231, Federal Reserve Bank of Minneapolis.
  5. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  6. James D. Hamilton, 1996. "Measuring the liquidity effect," Working Papers in Applied Economic Theory 96-06, Federal Reserve Bank of San Francisco.
  7. Daniel L. Thornton, 2006. "The daily liquidity effect," Working Papers 2006-020, Federal Reserve Bank of St. Louis.
  8. Seth Carpenter & Selva Demiralp, 2004. "The liquidity effect in the federal funds market: evidence from daily open market operations," Finance and Economics Discussion Series 2004-61, Board of Governors of the Federal Reserve System (U.S.).
  9. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  10. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  11. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, . "Liquidity, Information, and the Overnight Rate," IEW - Working Papers 186, Institute for Empirical Research in Economics - University of Zurich.
  12. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
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Citations

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Cited by:
  1. Jérôme Vandenbussche & Stanley Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets," IMF Working Papers 09/228, International Monetary Fund.
  2. Camilo González & Luisa Silva & Carmiña Vargas & Andrés M. Velasco, 2014. "Uncertainty in the Money Supply Mechanism and Interbank Markets in Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  3. Camilo González & Luisa F. Silva & Carmiña O. Vargas & Andrés M. Velasco, 2013. "An exploration on interbank markets and the operational framework of monetary policy in Colombia," Borradores de Economia 782, Banco de la Republica de Colombia.
  4. Marius Jurgilas, 2007. "Monetary Policy Under a Currency Board," Working papers 2007-34, University of Connecticut, Department of Economics.

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