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Excess Liquidity in Guyana: Theoretical and Policy Implications


  • Tarron Khemraj


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.

Suggested Citation

  • Tarron Khemraj, 2007. "Excess Liquidity in Guyana: Theoretical and Policy Implications," The IUP Journal of Financial Economics, IUP Publications, vol. 0(3), pages 42-58, September.
  • Handle: RePEc:icf:icfjfe:v:05:y:2007:i:3:p:42-58

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    References listed on IDEAS

    1. Nagayasu, Jun, 2001. "Currency crisis and contagion: evidence from exchange rates and sectoral stock indices of the Philippines and Thailand," Journal of Asian Economics, Elsevier, vol. 12(4), pages 529-546.
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    4. Moreno, R. & Pasadilla, G. & Remolona, E., 1998. "Asia's Financial Crisis: Lessons and Policy Responses," Papers 98-02, Economisch Institut voor het Midden en Kleinbedrijf-.
    5. DeJong, David N, et al, 1992. "Integration versus Trend Stationarity in Time Series," Econometrica, Econometric Society, vol. 60(2), pages 423-433, March.
    6. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
    7. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    8. Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000. "A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(3), pages 337-354.
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