Abstract This paper examines the effectiveness of monetary policy transmission to bank liquidity in countries operating under constrained monetary regimes, drawing on the case of Bosnia and Herzegovina’s currency board arrangement. Using monthly bank-level data (2006 - 2024), we apply a two-step empirical framework combining a Panel Vector Autoregression (PVAR) and a Panel Vector Error Correction Model (PVECM) to analyse the short and long-run effects of reserve requirements and the remuneration of excess reserves on bank liquidity. Our findings indicate that liquidity dynamics are largely driven by banks’ internal portfolio decisions, while monetary instruments can influence liquidity in the short term, but their overall impact is modest and considerably outweighed by internal bank-level factors such as lending intensity and foreign asset exposure. A stable long-run relationship is confirmed between liquidity, policy tools, and balance sheet fundamentals. Although the study considers bank size and ownership structure, the estimated effects represent system-wide averages. Nonetheless, the observed patterns are broadly consistent with the hypothesis that large and foreign-owned banks may exhibit lower sensitivity to domestic monetary impulses. The results suggest that in a currency board system, the transmission of monetary impulses is constrained and highly dependent on structural banking characteristics.
Dželihodžić et al. (Fri,) studied this question.
Synapse has enriched 5 closely related papers on similar clinical questions. Consider them for comparative context: