Interbank Market and Effectiveness of Monetary Policy in Malawi
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Date
2021-09-17
Authors
Kanyumbu, Esmie Koriheya
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
The study aimed at investigating how the interbank market affects the monetary policy
transmission mechanism in Malawi. To achieve that, the study analysed the nature
of the relationship between excess reserves and the interbank market rate and tried
to discuss other possible factors that affect the interbank market rates in Malawi and
limit the effectiveness of the central bank’s efforts that aim at influencing important
interest rates in the economy. The study further analysed the strength and speed at
which the interbank market rate affects other money market rates, specifically the
lending rate. Using financial markets monthly data for the period 2010:1 to 2018:6, the
study applied Ordinary Least Square methods for estimation using Error Correction
Model. From the results of the study, it is concluded that the interbank market is the
right platform through which the central bank can influence money market rates in
the process of monetary policy implementation. Interbank market rates respond to
levels of banking system liquidity at a speed that makes sense for monetary policy
and they are able to send significant signals to other relevant market rates like lending
rates. Drawing from these outcomes, the study recommends continued forecasting
and controlling of banking system liquidity by the central bank and establishment
of additional factors that affect the interbank market rate and hence limit the
central bank’s efforts. For further improvement in the monetary policy transmission
mechanism, the study recommends increased knowledge on interbank pricing models
for individual commercial banks and research on the informal sector’s reaction to
central bank’s policy actions