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March 2000 - Policymakers in countries undergoing banking crises should not worry about the structural stability of money demand functions; the behavior of money demand during crises can be modeled by the same function used during periods of tranquility. But policymakers should be aware that in some instances crises can give rise to variance instability in the price or inflation equations. Martinez Peria empirically investigates the monetary impact of banking crises in Chile, Colombia, Denmark, Japan, Kenya, Malaysia, and Uruguay. She uses cointegration analysis and error correction modeling to research: Whether money demand stability is threatened by banking crises; Whether crises bring about structural breaks in the relationship between monetary indicators and prices. Overall, she finds no systematic evidence that banking crises cause money demand instability. Nor do the results consistently support the notion that the relationship between monetary indicators and prices undergoes structural breaks during crises. However, although individual coefficients in price equations do not seem to be severely affected by crises, crises can sometimes give rise to variance instability in price or inflation equations. This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study banking crises. The study was funded by the Bank's Research Support Budget under the research project Monetary Policy and Monetary Indicators during Banking Crises (RPO 683-24). The author may be contacted at mmartinezperia@worldbank.org.

Central Banks --- Currencies and Exchange Rates --- Debt Markets --- Demand --- Demand For Money --- Deregulation --- Economic Theory and Research --- Emerging Markets --- Equations --- Exchange --- Exchange Rates --- Finance and Financial Sector Development --- Financial Intermediation --- Financial Literacy --- Fiscal and Monetary Policy --- Government Bonds --- Inflation --- Interest --- Interest Rates --- Labor Policies --- M2 --- Macroeconomics and Economic Growth --- Markets and Market Access --- Monetary Policy --- Money --- Multipliers --- Prices --- Private Sector Development --- Public Sector Development --- Social Protections and Labor --- Stock --- Stock Prices --- T-Bills --- Variables

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This paper discusses the challenging question of whether central banks should use treasury bills or central bank bills for draining excess liquidity in the banking system. While recognizing that there are practical reasons for using central bank bills, the paper argues that treasury bills are the first best option especially because positive externalities for the financial sector and the rest of the economy. However, the main considerations in the choice should be: (i) operational independence for the central bank; (ii) market development; and (iii) the strengthening of the transmission of monetary policy impulses.

Liquidity (Economics) --- Treasury bills --- Banks and banking, Central --- Banker's banks --- Banks, Central --- Central banking --- Central banks --- Banks and banking --- Bills, Treasury --- Bills and notes --- T-bills --- Government securities --- Assets, Frozen --- Frozen assets --- Finance --- Econometric models. --- Banks and Banking --- Investments: General --- Public Finance --- Debt --- Debt Management --- Sovereign Debt --- General Equilibrium and Disequilibrium: Financial Markets --- Monetary Policy --- Fiscal and Monetary Policy in Development --- Interest Rates: Determination, Term Structure, and Effects --- Wages, Compensation, and Labor Costs: Public Policy --- General Financial Markets: General (includes Measurement and Data) --- Central Banks and Their Policies --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Investment & securities --- Banking --- Public finance & taxation --- Central bank bills --- Treasury bills and bonds --- Securities --- Financial institutions --- Government debt management --- Public financial management (PFM) --- Financial instruments --- Debts, Public --- Chile