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Interbank market under the currency board: Case of Lithuania

  • Marius Jurgilas

    ()

    (Economics University of Connecticut)

This paper studies the liquidity effect in the environment of a currency board. Under such an environment, the endogeneity issue common to other monetary regimes does not arise, thereby allowing for a straightforward analysis. Using daily data from the interbank market in Lithuania, we estimate the liquidity effect and show that, contrarily to the existent literature, overnight interest rates tend to fall at the end of reserve holding period while being higher at the beginning. Thus the martingale hypothesis of the interest rates is rejected. It is also shown that banks do not utilize aggregate liquidity information provided by the Central Bank of Lithuania due to the structural impediments of the market

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 448.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:448
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  1. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 0393, European Central Bank.
  2. James D. Hamilton, 1996. "Measuring the liquidity effect," Working Papers in Applied Economic Theory 96-06, Federal Reserve Bank of San Francisco.
  3. Gaspar, Vítor & Pérez Quirós, Gabriel & Rodríguez Mendizábal, Hugo, 2004. "Interest rate determination in the interbank market," Working Paper Series 0351, European Central Bank.
  4. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, . "Liquidity, Information, and the Overnight Rate," IEW - Working Papers 186, Institute for Empirical Research in Economics - University of Zurich.
  5. Malmsten, Hans, 2004. "Evaluating exponential GARCH models," SSE/EFI Working Paper Series in Economics and Finance 564, Stockholm School of Economics, revised 03 Sep 2004.
  6. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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