Optimal Reserves and Short‐Term Interest Rates in a Model of Bank Runs

A global game framework of bank runs is used to analyse a bank's choice of its reserve level and short‐term interest rate. Higher level of reserves and a lower short‐term interest rate would decrease the probability of bank runs. When the bank's reserve policy is transparent, it will hold excess reserves to discourage withdrawals by patient depositors. This inefficiency of excess reserves increases with the proportion of impatient depositors. When the bank has private information about its reserve level, it will follow a more risky strategy of choosing lower reserves and higher early return than what maximizes depositor welfare and increases the probability of bank runs.     

Monetary autonomy in selected Asian economies: The role of international reserves

With the increased financial integration of Asian countries, monetary policy takes on the additional role of maintaining the stability of the financial system along with the traditional objectives of promoting growth and employment with price stability. Given the importance and relevance of monetary policy in Asian countries, we examine monetary autonomy and its interaction with financial integration, currency regimes and international reserves for the past two decades in the following Asian countries: Thailand, Korea, Indonesia, the Philippines, and India. The empirical analysis reveals two significant and interesting findings that have policy implications. First, Thailand, Korea and Indonesia, countries that have moved towards a floating currency regime, experienced simultaneous declines in the sensitivity of their interest rates (thereby increasing monetary autonomy), while India continues to increase the sensitivity of its interest rates with a pegged exchange rate and increased financial integration. Second, in all of the studied economies, the accumulation of international reserves has contributed, to some extent, to the retention of monetary autonomy in terms of preventing the sensitivity of the interest rates from rising. We speculate that the accumulation of reserves plays the role of an anchor for monetary autonomy in emerging market economies facing a “fear of floating”.