Is the Interest Rate Corridor an Effective Instrument to Dampen the Accumulation of Excess Reserves and the Inter-bank Rate Volatility?

Nombulelo Gumata () and Eliphas Ndou
Additional contact information
Nombulelo Gumata: South African Reserve Bank

Chapter Chapter 15 in Achieving Price, Financial and Macro-Economic Stability in South Africa, 2021, pp 235-264 from Springer

Abstract: Abstract Is the interest rate corridor an effective instrument to dampen the accumulation of excess reserves and inter-bank rate volatility? Yes, it is. We find that the interbank rates volatility is dependent on excess reserves regimes. The overnight forex rate volatility increases more compared to the South African overnight rate (Sabor) in response to positive shocks to banks’ excess reserves. Positive shocks to banks’ excess reserves explain a larger variation in the overnight forex rate volatility compared to the Sabor rate volatility. In addition, the estimated threshold for the excess reserves of R100 billion has a statistical and economic significance in the response of the inter-bank rates and their volatility. The Sabor and overnight forex rate volatilities decline in the low excess reserves regime compared to the high excess reserves regime. Thus, there is a direct relationship between the level of excess reserves and the inter-bank rate volatility. Lowering the level of excess reserves below the R100 billion threshold will assist in lowering the volatility in the Sabor and overnight forex rates. Furthermore, the results of the transition function imply that the interest rate corridor floor allows the South African Reserve Bank to separate the interest rate policy (monetary policy stance) from the liquidity policy. This means that policymakers can gradually phase in the autonomous use of the deposit rate to manage bank liquidity or excess reserves. This gradual phasing in of the autonomous use of the deposit rate to manage bank liquidity or excess reserves can take the approach of tiering excess reserves and use the estimated threshold as a guideline.

Date: 2021
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-66340-7_15

Ordering information: This item can be ordered from
http://www.springer.com/9783030663407

DOI: 10.1007/978-3-030-66340-7_15

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().