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Uncertainty in the Money supply mechanism and interbank markets in Colombia

Author

Listed:
  • Camilo González

    ()

  • Luisa Silva

    ()

  • Carmiña Vargas

    ()

  • Andrés M. Velasco

    ()

Abstract

We set a dynamic stochastic model for the interbank daily market forfunds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneouscommercial banks, daily open market operations held by the Central Bank(auctions and window facilities), and idiosyncratic demand shocks anduncertainty in the daily auction. Analytical derivations of their decisionmaking process show that banks involvement in the interbank market andopen market operations depend on their individualrequirement constraintand daily liquid assets. Our results do not show a linkage between theuncertainty in the money supply mechanism and activity in the interbankmarket. Equilibrium interest rate for the interbank market is derived,and is shown that it is distorted by uncertainty at the daily auction heldby the monetary authority. Using data for Colombia, we test the mainresults of the model and corroborate the Martingale hypothesis for theinterbank interest rate.

Suggested Citation

  • Camilo González & Luisa Silva & Carmiña Vargas & Andrés M. Velasco, 2013. "Uncertainty in the Money supply mechanism and interbank markets in Colombia," BORRADORES DE ECONOMIA 011094, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:011094
    as

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    References listed on IDEAS

    as
    1. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2011. "Small sample properties of alternative tests for martingale difference hypothesis," Economics Letters, Elsevier, vol. 110(2), pages 151-154, February.
    2. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics.
    3. Pamela A. Cardozo & Carlos A. Huertas C. & Julián A. Parra P. & Lina V. Patiño Echeverri, 2011. "Mercado interbancario colombiano y manejo de liquidez del Banco de la República," BORRADORES DE ECONOMIA 009017, BANCO DE LA REPÚBLICA.
    4. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank.
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    Cited by:

    1. repec:eee:finsta:v:35:y:2018:i:c:p:75-92 is not listed on IDEAS
    2. Miguel Sarmiento & Jorge Cely & Carlos León, 2015. "Monitoring the Unsecured Interbank Funds Market," BORRADORES DE ECONOMIA 014080, BANCO DE LA REPÚBLICA.
    3. Carlos León & Clara Machado & Miguel Sarmiento, 2014. "Identifying central bank liquidity super-spreaders in interbank funds networks," BORRADORES DE ECONOMIA 011187, BANCO DE LA REPÚBLICA.
    4. Sarmiento, Miguel & Cely, Jorge & León, Carlos, 2017. "An early warning indicator system to monitor the unsecured interbank funds market," Research in International Business and Finance, Elsevier, vol. 40(C), pages 114-128.
    5. repec:cml:moneta:v:iv:y:2016:i:2:p:153-193 is not listed on IDEAS

    More about this item

    Keywords

    Interbank Market; Overnight Rates; Reserve Demand;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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