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Interbank Markets under Currency Boards

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  • Marius Jurgilas

    (University of Connecticut)

Abstract

This paper analyzes interbank markets under currency boards. Under such an environment, problematic endogeneity issues common to other monetary regimes do not arise. Using daily data from the interbank markets in Bulgaria and Lithuania we show, that contrary to the existing literature, overnight interest rates tend to decrease towards the end of the reserve holding period. Empirical results are supported by a finite horizon heterogeneous agents model showing that interest rates tend to decrease in the case of excess aggregate reserves in the banking system. Results contrast with Quir'os and Mendiz'abal (2006) who find that interest rates should be increasing regardless of the outstanding aggregate liquidity in the market. We also show that responsiveness of banks to interest rate changes diminishes as the end of reserve holding period approaches. Under certain circumstances this could lead to multiple equilibria with increasing or decreasing interest rates.

Suggested Citation

  • Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2006-19
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    References listed on IDEAS

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    1. Quiros, Gabriel Perez & Mendizabal, Hugo Rodriguez, 2006. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 91-118, February.
    2. Carpenter, Seth & Demiralp, Selva, 2006. "The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 901-920, June.
    3. Gaspar, Vitor & Pérez-Quirós, Gabriel & Rodriguez Mendizabal, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers.
    4. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, "undated". "Liquidity, Information, and the Overnight Rate," IEW - Working Papers 186, Institute for Empirical Research in Economics - University of Zurich.
    5. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
    6. Daniel L. Thornton, 2006. "The daily liquidity effect," Working Papers 2006-020, Federal Reserve Bank of St. Louis.
    7. Burkhard Heer & Alfred Maußner, 2024. "Dynamic General Equilibrium Modeling," Springer Texts in Business and Economics, Springer, edition 3, number 978-3-031-51681-8, April.
    8. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
    9. José-Víctor Ríos-Rull, 1997. "Computation of equilibria in heterogeneous agent models," Staff Report 231, Federal Reserve Bank of Minneapolis.
    10. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    11. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, vol. 83(Jul), pages 59-82.
    12. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
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    Cited by:

    1. Camilo González & Carmiña Vargas & Luisa Silva & Andrés M. Velasco, 2014. "Uncertainty in the Money Supply Mechanism and Interbank Markets in Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 32(73), pages 36-49, July.
    2. Camilo González & Luisa F. Silva & Carmiña O. Vargas & Andrés M. Velasco, 2013. "An exploration on interbank markets and the operational framework of monetary policy in Colombia," Borradores de Economia 782, Banco de la Republica de Colombia.
    3. Mr. Jerome Vandenbussche & Mr. Stanley B Watt & Szabolcs Blazsek, 2009. "The Liquidity and Liquidity Distribution Effects in Emerging Markets: The Case of Jordan," IMF Working Papers 2009/228, International Monetary Fund.
    4. Marius Jurgilas, 2007. "Monetary Policy Under a Currency Board," Working papers 2007-34, University of Connecticut, Department of Economics.

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    More about this item

    Keywords

    Interbank market; Currency board;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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