Changes in the Liquidity Effect Over Time: Evidence from Four Monetary Policy Regimes

Working paper 704
Dawid Johannes van Lill
Publication date: 
August, 2017
This paper employs a time-varying parameter vector autoregressive (TVP-VAR) model to establish the nature of the relationship between central bank liabilities and the overnight policy rate. Four countries with different monetary policy regimes were considered. It was found that a clear negative relationship between these variables exists only in the case of one regime, namely the reserve regime. This result indicates that the introduction of new operational frameworks for central banks have challenged the traditional model of monetary policy implementation. A potential practical implication of the ‘decoupling’ of interest rates from reserves is that the central bank in the United States and Canada could potentially use their balance sheet alongside conventional interest rate policy. However, as there is practically no decoupling in South Africa, and very little evidence in Norway, such a policy recommendation would not apply.
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