A Posthumous Note on the Lombard Rate in Mauritius
The current study sheds light on the Lombard Rate which had been used as the main stance for monetary policy in Mauritius prior to the introduction of the Key Repo Rate. Results show that yields on Treasury Bills were cointegrated with movements in the Lombard Rate. In the long run, yields for different maturities adjusted more or less by the same amount. Most importantly, a 1% change in the Lombard Rate triggered approximately a 0.37% change in the respective Treasury Bills yields, showing that local market players did not fully adjust their bidding yields patterns. The most plausible explanation relates to an excessively strong level of aggressiveness in the Mauritian Treasury Bill market. Based on the ingrained Mauritian culture of depositing money mainly in banks, banks are thereby usually awash in cash which compel them to invest aggressively in the Treasury Bill market to ensure comfortable returns. Policy-wise, this implies that full monetary policy transmission mechanism onto the Treasury Bill market will always be incomplete on the back of conventional depositors, which ironically sounds like a good omen to the government in terms of undermined cost for public debt.
KeywordsInterest Rate Monetary Policy Unit Root Test Term Structure Banking Sector
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