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Interbank Markets under Currency Boards

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Author Info
Marius Jurgilas (University of Connecticut)

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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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File URL: http://www.econ.uconn.edu/working/2006-19.pdf
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Publisher 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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Related research
Keywords: Interbank market; Currency board;

Other versions of this item:

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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Vítor Gaspar & Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2004. "Interest rate determination in the interbank market," Working Paper Series 351, European Central Bank. [Downloadable!]
    Other versions:
  2. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, . "Liquidity, Information, and the Overnight Rate," IEW - Working Papers iewwp186, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  3. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82. [Downloadable!]
  4. Carpenter, Seth & Demiralp, Selva, 2006. "The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 901-920, June. [Downloadable!] (restricted)
    Other versions:
  5. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November. [Downloadable!] (restricted)
    Other versions:
  6. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  7. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March. [Downloadable!] (restricted)
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  8. Jose-Victor Rios-Rull, 1997. "Computation of equilibria in heterogeneous agent models," Staff Report 231, Federal Reserve Bank of Minneapolis. [Downloadable!]
  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. [Downloadable!] (restricted)
    Other versions:
  10. Daniel L. Thornton, 2006. "The daily liquidity effect," Working Papers 2006-020, Federal Reserve Bank of St. Louis. [Downloadable!]
  11. Quiros, Gabriel Perez & Mendizabal, Hugo Rodriguez, 2006. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 91-118, February. [Downloadable!] (restricted)
    Other versions:
  12. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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