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Liquidity, the October 2008 Speculative Attack and the Central Bank Reputation

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  • Croitoru, Lucian

    (The National Bank of Romania, the Romanian Center for Economic Policies, the Faculty of International Business and Economics.)

Abstract

This paper discusses the causes that led to an increase in the average interbank money market rate far above the policy rate in the period 17 October-5 November 2008. Data do not support the assumption that interest rate volatility was generated by inadequate liquidity management in the banking system or by banks’ collateral volume and interbank collateral structure. I present a method of identifying a currency crisis and use it to show that the high interest rate volatility was the result of a speculative attack on the Romanian leu. This has altered liquidity flows between credit institutions, thus entailing a higher interest rate. The paper also shows that the central bank tailored its liquidity management to counter the speculative attack and create favorable conditions for the interest rate to return to normal levels. It explains the logic and the reasons behind the speculative attack and shows the role that central bank reputation played during this episode and in the buildup of risks in the run-up to the global financial crisis.

Suggested Citation

  • Croitoru, Lucian, 2013. "Liquidity, the October 2008 Speculative Attack and the Central Bank Reputation," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 18-51, June.
  • Handle: RePEc:rjr:romjef:v::y:2013:i:2:p:18-51
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    References listed on IDEAS

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    Cited by:

    1. Diaconescu Diana Raluca & Botezatu Hortensia Paula, 2015. "National Bank Of Romania Monetary Policy Transmission Mechanism During The Crisis," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 327-333, April.

    More about this item

    Keywords

    financial crisis; speculative attack; central bank credibility; foreign rezerves;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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