Excess Liquidity in Guyana: Theoretical and Policy Implications
The paper argues that banks demand non-remunerative excess reserves because of: (i) markup interest rates in the loan market and the government Treasury bill market; and (ii) a foreign currency constraint in the market of foreign exchange. The minimum markup interest rates are consistent with an oligopolistic banking sector. The non-competitive nature of the government security market implies (i) there is no exogenous domestic interest rate to pin down the domestic term structure; and (ii) the theory of the banking firm when applied to underdeveloped economies has to be implemented in an open economy context. An indirect monetary policy which aims at managing excess bank reserves have very limited influence on the loan market.
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Volume (Year): V (2007)
Issue (Month): 3 (September)
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