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Uncertainty in the Money supply mechanism and interbank markets in Colombia

Camilo González (), Luisa Silva (), Carmina Vargas () and Andrés M. Velasco ()

BORRADORES DE ECONOMIA from BANCO DE LA REPÚBLICA

Abstract: We set a dynamic stochastic model for the interbank daily market forfunds in Colombia. The framework features exogenous reserve requirements and requirement period, competitive trading among heterogeneouscommercial banks, daily open market operations held by the Central Bank(auctions and window facilities), and idiosyncratic demand shocks anduncertainty in the daily auction. Analytical derivations of their decisionmaking process show that banks involvement in the interbank market andopen market operations depend on their individualrequirement constraintand daily liquid assets. Our results do not show a linkage between theuncertainty in the money supply mechanism and activity in the interbankmarket. Equilibrium interest rate for the interbank market is derived,and is shown that it is distorted by uncertainty at the daily auction heldby the monetary authority. Using data for Colombia, we test the mainresults of the model and corroborate the Martingale hypothesis for theinterbank interest rate.

Keywords: Interbank Market; Overnight Rates; Reserve Demand (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Pages: 34
Date: 2013-11-15
New Economics Papers: this item is included in nep-ban, nep-lam, nep-mac and nep-mon
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Related works:
Journal Article: Uncertainty in the Money Supply Mechanism and Interbank Markets in Colombia (2014) Downloads
Journal Article: Uncertainty in the Money Supply Mechanism and Interbank Markets in Colombia (2014) Downloads
Working Paper: Uncertainty in the Money supply mechanism and interbank markets in Colombia (2013) Downloads
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