This presentation examines why profit-maximizing commercial banks in PNG require excess unremunerated reserves. An autoregressive distributed lag model is used to estimate the determinants of excess reserves using time series data for the period January 2002 to December 2017. The model includes precautionary and inadvertent factors that affect banks’ excess reserves commercial. The results suggest that the discount rate, demand deposit volatility, and private sector deposits contribute to the accumulation of excess reserves, while foreign exchange reserves, credit to the private sector, and treasury bill rates effectively reduce pressure on excess reserves. The reserve requirement ratio, however, is not effective in influencing the demand for excess reserves. This empirical analysis concludes that involuntary variables are the main determinants of excess reserves in PNG – and suggests that to deal with persistent excess reserves in the banking system, the central bank could consider potential policy interventions such as paying interest on reserves that commercial banks hold above the required limit and stimulate demand for domestic credit.
Thomas WangiPhD Scholar, Arndt-Corden Department of Economics, ANU
This seminar is free and open to the public. Registration is required to attend the seminar. You can attend at the Brindabella Theater (Crawford School of Public Policy, ANU), MBA Suite (SBPP building, UPNG) or online via Zoom.