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

José Sánchez-Fung

No 2008-2, Economics Discussion Papers from School of Economics, Kingston University London

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.

Keywords: interbank market; financial stability; monetary policy; IMF stabilisation programme; Dominican Republic. (search for similar items in EconPapers)
JEL-codes: E43 G21 G28 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2008-10-22
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