Abstract
In this monograph we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR (vector autoregressive or panel vector autoregressive) and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.
Highlights
2 Literature review 3 Monetary policy operational frameworks in Poland, the Czech Republic, Hungary and the euro area 4 Excess reserves, interest rate corridor and money market interest rates4.1 Models 4.2 Data and estimation 4.3 Results 5 Interest rate corridor and turnover on overnight money market 5.1 Models 5.2 Data and estimation 5.3 Results 6 Excess reserves and loans, money supply and money multiplier 6.1 Models 6.2 Data and estimation 6.3 Results
In this study we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply
We use mainly data for Poland, but in some cases, for robustness, for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland
Summary
2 Literature review 3 Monetary policy operational frameworks in Poland, the Czech Republic, Hungary and the euro area 4 Excess reserves, interest rate corridor and money market interest rates4.1 Models 4.2 Data and estimation 4.3 Results 5 Interest rate corridor and turnover on overnight money market 5.1 Models 5.2 Data and estimation 5.3 Results 6 Excess reserves and loans, money supply and money multiplier 6.1 Models 6.2 Data and estimation 6.3 Results. Economic activity and inflation developments appeared to require the additional easing of monetary conditions Their central banks have introduced balance sheet policies, such as large-scale asset purchases, known as quantitative easing. They have been aimed mainly at lowering market rates further. The amount of reserves in the banking sector has increased significantly above the reserve requirement, in contrast to the pre-crisis environment It has brought a renewed interest in the consequences of excess reserves, surplus liquidity and monetary policy operation frameworks more generally (see, for example, Bindseil, 2016)
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