Abstract
This paper examines the monetary policy framework of Guyana. Monetary policy is motivated by the IMF's financial programming model. One aspect of the model assumes that the reserve position of the banking system determines the system's ability to extend credit. Excess liquidity, therefore, can encourage reckless bank lending, augmenting the monetary aggregates in the process, and hence creating inflationary pressures. Therefore, any excess must be sterilized at all times. Associated with the sterilization is the growing domestic debt. This paper argues against such a mechanical view of how monetary aggregates can affect the economy. Innovation accounting within the VAR framework is conducted to gauge what factors might account for variations in excess bank liquidity. Findings suggest that shocks in excess liquidity are best explained by its own shocks, shocks in foreign assets of the banking system, and shocks in commercial bank loans to the private sector.
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