Interbank market and monetary policy in Rwanda

Abstract

The paper explores the influence of the banks’ network characteristics on the spread between the interbank market rate and the central bank rate and, therefore, on the monetary policy transmission. The paper models daily spread at the bank level as a function of bank positions in the interbank network and other bank features in a panel setup. The findings suggest that high centrality in the network market seems to back the monetary policy transmission by narrowing the spread. However, some contradiction in the direction of this influence can emerge as the findings also indicate that the relationship-borrowing and diversification of lenders push up the spread and do not support the transmission of monetary policy. To improve the latter, the central bank should support initiatives that create more hub-banks or encourage banks to actively participate in the interbank market and increase the dynamism that supports the transmission.