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The impact of the excess reserves of the banking sector on interest rates and money supply in Poland

Author

Listed:
  • Mariusz Kapuściński

    (SGH Warsaw School of Economics)

  • Ilona Pietryka

    (Nicolaus Copernicus University in Torun)

Abstract

In this study we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.

Suggested Citation

  • Mariusz Kapuściński & Ilona Pietryka, 2019. "The impact of the excess reserves of the banking sector on interest rates and money supply in Poland," NBP Working Papers 300, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:300
    Note: The authors would like to thank the participants of the seminar at Narodowy Bank Polski, Marta Korczak and Dorota Scibisz for their useful comments and the employees of the Magyar Nemzeti Bank for their kind help with data for Hungary.
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    Keywords

    excess reserves; interest rate pass through; money multiplier; GARCH; VAR; panel data models;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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