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Completed papers:
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Interbank Markets Under Currency Boards
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
Quirós and Mendizábal (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.
Presented at:
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13th International Conference on
Computing in Economics and Finance, June 14 - 16, 2007,
Montréal, Quebec, Canada
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Seminar presentations at University
of Connecticut (USA), Cardiff University (UK), CERGE-IE (Czech
Republic), Bundesbank (Germany), Stockholm Institute of
Transition Economics (Sweden), SSE Riga (Latvia), Elon
University (USA), February, 2007
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