Khemraj, Tarron (2008): Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana. Published in: Applied Economics , Vol. 41, No. 16 (November 2009): pp. 2073-2084.
Preview |
PDF
MPRA_paper_53127.pdf Download (337kB) | Preview |
Abstract
This paper examines why commercial banks in Guyana demand non-remunerated excess reserves, a phenomenon that became even more widespread after financial liberalisation. Despite the removal of capital controls, banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves. The findings suggest that commercial banks do not demand excess reserves for precautionary purpose – which is the conclusion of several other studies – but rather because of the maintained constraint. The estimated sterilisation coefficient is consistent with the hypothesis of an enforced constraint. The results, moreover, suggest an alternative way of looking at the monetary transmission mechanism in developing countries. The central bank maintains price and exchange rate stability through the accumulation of foreign reserves.
| Item Type: | MPRA Paper |
|---|---|
| Original Title: | Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana |
| Language: | English |
| Keywords: | Excess bank liquidity, monetary transmission mechanism, ARDL model, Guyana |
| Subjects: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy F - International Economics > F3 - International Finance > F31 - Foreign Exchange |
| Item ID: | 53127 |
| Depositing User: | Tarron Khemraj |
| Date Deposited: | 23 Jan 2014 03:03 |
| Last Modified: | 27 Sep 2019 20:23 |
| References: | Agenor, P., Aizenman, J and Hoffmaister, A. (2004) The Credit Crunch in East Asia: What Can Bank Excess Liquid Assets Tell Us? Journal of International Money and Finance, 23, 27-49. Alexander, W., Balino, T., Enoch, C. and others (1995) The Adoption of Indirect Instruments of Monetary Policy, IMF Occasional Paper 126, International Monetary Fund. Bahamani-Oskooee, M. and Rehman, H. (2005) The Stability of the Money Demand Function in Asian Developing Countries, Applied Economics, 37, 773-792. Baltensperger, E. (1980) Alternative Approaches to the Theory of the Banking Firm, Journal of Monetary Economics, 6, 1-37. Baltensperger, E. (1974) The Precautionary Demand for Reserves, American Economic Review, 64, 205-210. Brissimis, S., Gibson, H. and Tsakalotos, E. (2002) A Unifying Framework for Analyzing Offsetting Capital Flows and Sterilisation: Germany and the ERM, International Journal of Finance and Economics,7, 63-78. Calvo, G. (1991) The Perils of Sterilisation, IMF Staff Papers, 38, 921-926. Caprio, G. and Honohan, P. (1993) Excess Liquidity and Monetary Overhangs, World Development, 21, 523-533. Cumby, R. and Obstfeld, M. (1983) Capital Mobility and the Scope for Sterilisation: Mexico in the 1970s, In Financial Policies and the World Capital Market: the Problem of Latin American Countries, edited by P. Armella, R. Dornbusch and M. Obstfeld, pp. 245-276, Chicago: University of Chicago Press. D’Arista, J. (2006) The Impact of Capital Flows on the US Economy and Financial Markets, Financial Markets Centre (www.fmcenter.org). D’Arista, J. (2005) Causes and Consequences of the Build-up in Global Liquidity, Financial Markets Centre (www.fmcenter.org). Fielding, D. and Shorthand, A. (2005) Political Violence and Excess Liquidity in Egypt, Journal of Development Studies, 41, 542-557. Frost, P. (1971) Banks’ Demand for Excess Reserves, Journal of Political Economy, 79, 805-825. Huang, G. (1995) Modelling China’s Demand for International Reserves, Applied Financial Economics, 5, 357-366. Iturriaga, F. (2000) More on the Credit Channel of the Monetary Transmission Mechanism: An International Comparison, Applied Financial Economics, 10, 423-434. Khemraj, T. (2007) What does Excess Bank Liquidity say about the Loan Market in Less Developed Countries? DESA Working Paper No. 60, United Nations. Khemraj, T. (2006) Excess Liquidity, Oligopoly Banking and Monetary Policy in a Small Open Economy, PhD Dissertation, New York: New School for Social Research. Magee, S. (1976) The Empirical Evidence on the Monetary Approach to the Balance of Payments and Exchange Rates, American Economic Review Papers and Proceedings, 66, 163-170. Mishkin, F. (1995) Symposium on the Monetary Transmission Mechanism, Journal of Economic Perspectives, 9, 3-10. Morrison, G. (1966) Liquidity Preference of Commercial Banks, Chicago: University of Chicago Press. Saxegaard, M. (2006) Excess Liquidity and the Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa, Working Paper 06/115, International Monetary Fund. Seo, B. H. (2005) Sterilised Intervention and Monetary Control: The Case of Korea, In Foreign Exchange Rates, Capital Flows and Policy, edited by R. Driver, P. Sinclair and C. Thoenissen, pp. 344-368, New York: Routledge. Tarp, F. (1993) Stabilisation and Structural Adjustment: Macroeconomic Frameworks for Analyzing the Crisis in Sub-Saharan Africa, London: Routledge. Wooldridge, J. (2006) Introductory Econometrics: A Modern Approach (3rd edition), Mason: Thomson-South Western. |
| URI: | https://mpra.ub.uni-muenchen.de/id/eprint/53127 |
All papers reproduced by permission. Reproduction and distribution subject to the approval of the copyright owners.
| View Item |