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The day-to-day interbank market, volatility, and central bank intervention in a developing economy

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  • Sánchez-Fung, José R.

Abstract

This paper investigates banking system instability vis-à-vis the day-to-day interbank market and monetary policy effectiveness in the Dominican Republic. The analysis reveals a negative relationship among excess banking system reserves and the interbank interest rate, and shows that in crisis ‘news’ affect the interbank rate’s volatility asymmetrically and non-linearly. The paper also finds that the 2002-2003 banking crisis and the subsequent central bank intervention as a lender of last resort weakened monetary policy’s transmission mechanism. These events undermined the ensuing stabilization effort, stressing the pervasive short-run trade-off between preserving macroeconomic stability and safeguarding financial stability, and the pitfalls of monetary policymaking in a highly volatility setting.

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  • Sánchez-Fung, José R., 2008. "The day-to-day interbank market, volatility, and central bank intervention in a developing economy," MPRA Paper 15648, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15648
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    More about this item

    Keywords

    interbank market; financial stability; monetary policy; IMF stabilisation programme; Dominican Republic.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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