Interbank Market and Effectiveness of Monetary Policy in Malawi
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Date
2021-07-12
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 analyzed
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 analyzed
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 can 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.