Interbank Markets under Currency Boards
AbstractThis 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 InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2006-19.
Length: 30 pages
Date of creation: Oct 2006
Date of revision:
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Interbank market; Currency board;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-18 (All new papers)
- NEP-BAN-2006-11-18 (Banking)
- NEP-CBA-2006-11-18 (Central Banking)
- NEP-MAC-2006-11-18 (Macroeconomics)
- NEP-MON-2006-11-18 (Monetary Economics)
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