Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana

Tarron Khemraj

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Excess bank liquidity; monetary transmission mechanism; ARDL model; Guyana (search for similar items in EconPapers)
JEL-codes: E30 E42 E51 E52 F31 (search for similar items in EconPapers)
Date: 2008-01
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Citations: View citations in EconPapers (3)

Published in Applied Economics 16.41(2009): pp. 2073-2084

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