Excess reserves in Jamaican Commercial Banks: The implications for Monetary Policy

High levels of excess reserves have been a persistent feature of Jamaica’s commercial banking system within the past two decades. These reserves provide a positive impact in terms of the institutions’ ability to respond to liquidity shocks. Notwithstanding this, questions have been raised as to whether or not such high levels of excess reserves present challenges to the Central Bank in its pursuit of price stability. For example, banks have been able to easily find the wherewithal to extend credit, even when the Central Bank adopts an extremely tight monetary policy stance. In this context, this paper examines the trends in excess reserves of commercial banks in Jamaica during the period 1998 to 2010 and the challenges encountered by the Central Bank in the implementation of monetary policy. The paper estimates the demand for excess reserves using the autoregressive distributed lag (ARDL) bounds test approach developed by Pesaran et al. (2001). The empirical results show that the major determinants of the excess reserves of commercial banks in Jamaica in the long-run and short-run are the reserve requirements, fluctuations in the currency-to-deposit ratio, the deviation of income from trend, the volatility of income, the deficit of the Central Government and the interest rate offered on the BOJ’s 180-day security.