Excess liquidity, oligopoly banking and monetary policy in a small open economy

The dissertation examines why non-regulated commercial banks in Guyana demand non-remunerative and remunerative excess liquidity. The dissertation breaks from past studies by proposing two hypotheses that work simultaneously to explain the excess liquidity phenomenon. Firstly, banks desire a minimum rate of interest in the loan market and the government security market before investing in private sector loans or government securities, respectively. The minimum rate is derived from a Cournot oligopoly model. Hence, this is termed the minimum rate hypothesis. Secondly, banks do not invest all excess reserves in a safe foreign asset---in spite of the fact there is no official regulation which precludes such investments---because the central bank maintains an unofficial foreign currency constraint (in the domestic foreign currency market) by accumulating international reserves.; The theoretical model developed in the dissertation demonstrates that indirect monetary policy is likely to be ineffective when the banking system is non-competitive. Furthermore, the economic growth objective of the central bank is difficult to achieve in a non-competitive banking sector. The latter is demonstrated by a monetary growth model which indicates that increased deposits owing to financial liberalization do not necessarily lead to increased financial intermediation because of the portfolio of assets oligopolistic banks will tend to demand. The results of the dissertation point to another way of looking at the monetary transmission mechanism for a small open developing economy.