The day-to-day interbank market, volatility, and central bank intervention in a developing economy

Sanchez-Fung, Jose R. (2008) The day-to-day interbank market, volatility, and central bank intervention in a developing economy. (Discussion Paper) Kingston upon Thames, U.K. : Faculty of Arts & Social Sciences, Kingston University. 49 p. (Economics Discussion Paper)

Abstract

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 2002-3003 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.

Actions (Repository Editors)

Item Control Page Item Control Page