An Econometric Analysis of Deposit Rates,Security Holdings and Last-Resort Borrowing in the Short-Term Money Market

Abstract

The model developed in this paper explains the last-resort borrowing, deposit rate and portfolio decisions of dealers in the official short-term money market. Equations based on the model have been estimated from monthly data and they provide a very good explanation of the variables which are the subject of the study. They indicate that the last-resort rate has a significant influence on the rates paid on deposits with the dealers. Some equations explaining the supply of funds to the dealers have also been estimated. An important implication of these equations is that trading banks hold these deposits as a liquidity reserve against drawings on overdraft accounts. The policy implications of the results are discussed in the final section of the paper.

Keywords

DEPOSIT RATES LAST-RESORT BORROWING MONEY OVERDRAFT LIMITS SHORT-TERM MONEY MARKET

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