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Monetary Policy Efficiency in Conditions of Excess Liquidity Withdrawal

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Listed:
  • Martin Mandel
  • Vladimír Tomšík

Abstract

In case that a central bank is withdrawing excess liquidity, there arises a question whether the monetary policy based on repo operations (withdrawal repo) is identically efficient as the monetary policy relying on repo rate connected with reverse repo (issuance repo) when central banks provide liquidity. The analysis of this problem is a main subject of the article. Authors develop microeconomic model of commercial bank behaviour, which is used for the definition of conditions when the interest rate policy of central bank based alternatively on repo rates for repo and reverse repo operations is efficient. Statistical data (time series of 1998 - 2011, monthly data frequency) are analysed and econometric verification of alternative forms of econometric models is performed. The authors arrived at a conclusion that the Czech National Bank's monetary policy operating in conditions of excess liquidity withdrawal through repo operations is efficient. In case of the Czech Republic an increase in repo rate on withdrawal repo should lead to an increase in interest rates of commercial banks and to a reduction in the credit activity of commercial banks and hence to the successful implementation of Czech National Bank's restrictive monetary policy.

Suggested Citation

  • Martin Mandel & Vladimír Tomšík, 2014. "Monetary Policy Efficiency in Conditions of Excess Liquidity Withdrawal," Prague Economic Papers, Prague University of Economics and Business, vol. 2014(1), pages 3-23.
    • Handle: RePEc:prg:jnlpep:v:2014:y:2014:i:1:id:470:p:3-23
    DOI: 10.18267/j.pep.470
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    References listed on IDEAS

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    1. Basil John Moore, 2006. "Shaking the Invisible Hand," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-51213-9, March.
    2. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    3. Adam Geršl & Tomáš Holub, 2006. "Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 475-491, October.
    4. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    5. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    6. Mirdala, Rajmund, 2009. "Interest rate transmission mechanism of the monetary policy in the selected EMU candidate countries (SVAR approach)," MPRA Paper 14072, University Library of Munich, Germany.
    7. Rajmund Mirdala, 2009. "Interest Rate Transmission Mechanism of Monetary Policy in the Selected EMU Candidate Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 359-377, September.
    8. M S Mohanty & Philip Turner, 2008. "Monetary policy transmission in emerging market economies: what is new?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 1-59, Bank for International Settlements.
    9. Jan Frait & Martin Melecký & Helena Horská, 2002. "Recese, deflace, bankovní krize a past likvidity v Japonsku [Recession, deflation, bank crisis and liquidity trap in Japan]," Politická ekonomie, Prague University of Economics and Business, vol. 2002(2).
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    Citations

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    Cited by:

    1. Tomas Klinger & Petr Teply, 2016. "The Nexus Between Systemic Risk and Sovereign Crises," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 50-69, February.
    2. Hana Džmuráňová & Petr Teplý, . "Why Are Savings Accounts Perceived as Risky Bank Products?," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-17.
    3. Hana Džmuráňová & Petr Teplý, 2016. "Why Are Savings Accounts Perceived as Risky Bank Products?," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(5), pages 617-633.
    4. Dušan Staniek, 2016. "The Czech Crown Money Market as the Source for Pricing Customer Cash Products," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2016(3), pages 139-154.
    5. repec:cnb:ocpubv:rb13/1 is not listed on IDEAS
    6. repec:cnb:ocpubv:rb14/2 is not listed on IDEAS
    7. Dušan Staniek, . "Cross-Currency Basis Spread and Its Impact on Corporate Lending Rates in the Czech Banking Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 0.
    8. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    9. Dušan Staniek, 2018. "The Expectations Hypothesis in the Theory and Practice of Current Interest Rate Instruments [Hypotéza očekávání v teorii a praxi současných úrokových instrumentů]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(2), pages 61-79.
    10. repec:cnb:ocpubv:rb13/2 is not listed on IDEAS
    11. repec:cnb:ocpubv:rb14/1 is not listed on IDEAS

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    More about this item

    Keywords

    Czech National Bank; econometric model; repo rate; transmission mechanism of monetary policy;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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