Sánchez-Fung, José R. (2008): The day-to-day interbank market, volatility, and central bank intervention in a developing economy.
Download (481kB) | Preview
This paper investigates banking system instability vis-à-vis the day-to-day interbank market and monetary policy effectiveness in the Dominican Republic. The analysis reveals a negative relationship among excess banking system reserves and the interbank interest rate, and shows that in crisis ‘news’ affect the interbank rate’s volatility asymmetrically and non-linearly. The paper also finds that the 2002-2003 banking crisis and the subsequent central bank intervention as a lender of last resort weakened monetary policy’s transmission mechanism. These events undermined the ensuing stabilization effort, stressing the pervasive short-run trade-off between preserving macroeconomic stability and safeguarding financial stability, and the pitfalls of monetary policymaking in a highly volatility setting.
|Item Type:||MPRA Paper|
|Original Title:||The day-to-day interbank market, volatility, and central bank intervention in a developing economy|
|Keywords:||interbank market; financial stability; monetary policy; IMF stabilisation programme; Dominican Republic.|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||José R. Sánchez-Fung|
|Date Deposited:||12. Jun 2009 03:13|
|Last Modified:||12. Feb 2013 12:03|
Agénor, Pierre-Richard, and Peter J. Montiel (1999) Development macroeconomics, second edition, Princeton University Press.
Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee (2000) A simple model of monetary policy and currency crises, European Economic Review, 44, 728-738.
Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee (2004) Financial development and the instability of open economies, Journal of Monetary Economics, 50, 1077-1106.
Bartolini, Leonardo, and Alessandro Prati (2003) The execution of monetary policy: A tale of two central banks, Economic Policy, 435-467, October.
Bernanke, Ben S., and Alan S. Blinder (1988) Credit, money, and aggregate demand, American Economic Review Papers and Proceedings, 78, 435-439.
Bernanke, Ben S., and Michael Woodford (Eds.) (2004) The inflation targeting debate. Chicago, University of Chicago Press.
Bindseil, Ulrich (2004) Monetary policy implementation: Theory, past, and present, Oxford University Press.
Bollerslev, Timothy (1986) Generalised autoregressive conditional heterocedasticity, Journal of Econometrics, 31, 307-27.
Broda, Christian, and Eduardo Levy Yeyati (2006) Endogenous deposit dollarization, Journal of Money, Credit, and Banking, 38, 963-988.
Carstens, Agustín S., and Luis I. Jácome H. (2005) Latin American central bank reform: Problems and challenges, International Monetary Fund Working Paper 05/114, Washington, D.C., June.
Céspedes, Luis Felipe, Roberto Chang, and Andrés Velasco (2003) IS-LM-BP in the Pampas, IMF Staff Papers, 50, special issue, 143-156.
Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (1999) Monetary policy shocks: what have we learned and to what end? Chapter 2 in John B. Taylor and Michael Woodford (Eds.), Handbook of Macroeconomics, Volume 1-A, pages 65-148, Elsevier Science Publishers, The Netherlands.
Christiano, Lawrence J., Christopher Gust, and Jorge Roldos (2004) Monetary policy in a financial crisis, Journal of Economic Theory, 119, 64-103.
Clouse, James A., and Douglas W. Elmendorf (1997) Declining required reserves and the volatility of the federal funds rate, Federal Reserve Board Finance and Economics Discussion Series 1997-30, Washington, D.C.
Cook, Timothy, and Thomas Hahn (1989) The effect of changes in the federal funds rate target on market interest rates in the 1970s, Journal of Monetary Economics, 24, 331-351.
Demirgüç-Kunt, Asli, and Enrica Detragiache (2005) Cross-country empirical studies of systemic bank distress: A survey, National Institute Economic Review, no. 192, pages 68-93.
De Nicoló, Gianni, Patrick Honohan, and Alain Ize (2005) Dollarization of bank deposits: Causes and consequences, Journal of Banking and Finance, 29, 1697-1727.
Devereux, Michael B., and Enrique G. Mendoza (2006) Emerging markets and macroeconomic volatility: Lessons from a decade of financial debacles, Journal of International Economics, 69, 1-5.
Easterly, William (2006) An identity crisis? Examining IMF financial programming. Forthcoming, World Development.
Engle, Robert F., and Victor K. Ng (1993) Measuring and testing the impact of news on volatility, Journal of Finance, 48, 1749-1778.
Flood, Robert P., and Andrew K. Rose (2002) Uncovered interest parity in crisis, IMF Staff Papers, 49, 252-266.
Fraga, Arminio, Ilan Goldfajn, and André Minella (2004) Inflation targeting in emerging market economies, NBER Macroeconomics Annual 2003, 365-400, MIT Press, Cambridge, MA.
Frankel, Jeffrey A. (2005) Contractionary currency crashes in developing countries, IMF Staff Papers, 52, 149-192.
Freixas, Xavier, Bruno M. Parigi, and Jean-Charles Rochet (2000) Systemic risk, interbank relations, and liquidity provision by the Central Bank, Journal of Money, Credit, and Banking, 32, 611-638.
Fry, Maxwell J., Charles A.E. Goodhart, and Alvaro Almeida (1996) Central banking in developing countries: Objectives, activities and independence, Routledge and Bank of England, London.
Goodhart, Charles A.E., and Haizhou Huang (2005) The lender of last resort, Journal of Banking and Finance, 29, 1059-1082.
Goodfriend, Marvin, and Jeffrey M. Lacker (1999) Limited commitment and central bank lending, Federal Reserve Bank of Richmond Economic Quarterly, 85, 1-27.
Halac, Marina, and Sergio Schmukler (2004) Distributional effects of crises: The role of financial transfers, Economía-Journal of the Latin American and Caribbean Economic Association, 5 (1), 1-67.
Hausmann, Ricardo, Dani Rodrik, and Andrés Velasco (2004) Growth diagnostics, mimeo, JFK School of Government, Harvard University, Cambridge, MA.
Hendry, David F. (1995) Dynamic econometrics, Oxford University Press, Oxford.
Hendry, David F., Adrian R. Pagan, and J. Denis Sargan (1984) Dynamic specification, Chapter 18 in Zvi Griliches and Michael Intrilligator (eds.), Handbook of Econometrics, Volume 2, 1231-1303. Elsevier Science Publishers, The Netherlands.
Hendry, David F., and Hans-Martin Krolzig (2005) The properties of automatic GETS modelling, Economic Journal, 115, C32-C61.
Hentschel, L. (1995) All in the family: Nesting symmetric and asymmetric GARCH models, Journal of Financial Economics, 39, 71-104.
Hoggarth, Glen, Ricardo Reis, and Victoria Saporta (2002) Costs of banking system instability: Some empirical evidence, Journal of Banking and Finance, 26, 825-855.
Hoover, Kevin D., and S. J. Perez (1999) Data mining reconsidered: Encompassing and the general-to-specific approach to specification search, Econometrics Journal, 2, 167-191.
Finger, Harald, and Mauro Mecagni (2007) Sovereign debt restructuring and debt sustainability: An analysis of recent cross-country experience, Occasional Paper 255, International Monetary Fund, Washington, D.C.
Kaminsky, Graciela L., and Carmen M. Reinhart (1999) The twin crises: The causes of banking and balance-of-payments problems, American Economic Review, 89, 473-500.
Kuttner, Kenneth (2001) Monetary policy surprises and interest rates: Evidence from the Fed funds futures market, Journal of Monetary Economics, 47, 523-544.
Levy-Yeyati, Eduardo (2006) Financial dollarization: evaluating the consequences, Economic Policy, 61-118, January.
Martínez Pería, Maria Soledad (2002) The impact of banking crises on money demand and price stability, IMF Staff Papers, 49, 267-312.
Mishkin, Frederic S., and Miguel A. Savastano (2001) Monetary policy strategies for Latin America, Journal of Development Economics, 66, 415-444.
Montiel, Peter J. (1991) The transmission mechanism for monetary policy in developing countries, IMF Staff Papers, 38, 83-108.
Ocampo, José Antonio (2004) Latin America’s growth and equity frustrations during structural reforms, Journal of Economic Perspectives, 18, 67-88.
Prati, Alessandro, Leonardo Bartolini, and Giuseppe Bertola (2003) The overnight interbank market: Evidence from the G-7 and the Eurozone, Journal of Banking and Finance, 27, 2045-2083.
Poole, William (1968) Commercial bank reserve management in a stochastic model: Implications for monetary policy, Journal of Finance, 23, 769-791.
Rochet, Jean-Charles, and Jean Tirole (1996) Interbank lending and systemic risk, Journal of Money, Credit, and Banking, 28, 733-762.
Rudebusch, Glenn D. (1995) Federal Reserve interest rate targeting, rational expectations, and the term structure, Journal of Monetary Economics, 35, 245-274.
Sarno, Lucio, and Thornton, Daniel L. (2003) The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation Journal of Banking and Finance, 27, 1079-1110.
Schmidt-Hebbel, Klaus, and Alejandro M. Werner (2002) Inflation targeting in Brazil, Chile, and Mexico: Performance, credibility, and the exchange rate, Economía-The Journal of the Latin American and Caribbean Economic Association, 2 (2), 31-89.
Sellon, Jr., Gordon H., and Stuart E. Weiner (1996) Monetary policy without reserve requirements: Analytical issues, Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter, 5-24.
Shiller, Robert J. (1990) The term structure of interest rates, Chapter 13 in Benjamin H. Friedman and Frank H. Hahn (Eds.), Handbook of Monetary Economics, Vol. 1, Elsevier Science Publishers, The Netherlands.
Stiglitz, Joseph, and A. Weiss (1981) Credit rationing in markets with imperfect information, American Economic Review, 71, 393-410.
Stock, James H., and Mark W. Watson (2001) Vector autoregressions, Journal of Economic Perspectives, 15, 101-115.
Walsh, Carl E. (2003) Monetary theory and policy, second edition, MIT Press, MA.
Whitesell, William (2006) Interest rate corridors and reserves, Journal of Monetary Economics, 53, 1177-1195.