Excess US bank reserves and the short-term interest rate differentials: evidence from bivariate cointegration analysis

This paper seeks to explore the possible long-run causal connection between the excess US bank reserves and the short-term interest rate differentials (differences between the federal funds rates and discount rates) within th e well-known bivariate cointegration framework. It uses monthly data from F ebruary 1984 through March 1992. Each time series is nonstationary and reve als I(1) behaviour. There is evidence of a long-run equilibrium relation be tween the two variables. The estimates of the error-correction models revea l a unidirectional long-run causality flowing from the short-term interest rate differentials to the excess US bank reserves.