*5.1.1. Conclusions about the LCR model*

One of the main contributions of this book chapter is the way the LCR dynamics model is constructed by using stochastic techniques. This model depends on HQLAs, NCOs as well as the liquidity provisioning rate. We believe that this is an addition to pre-existing literature because it captures some of the uncertainty associated with LCR variables. In this regard, we provide a theoretical-quantitative modeling framework for establishing bank LCR reference processes and the making of decisions about liquidity provisioning rates and asset allocation.

In Subsecdtion 2.1, we mention the possibility of adjusting the cash injection rate depending on whether the bank is experiencing deficit or surplus liquidity. The latter occurs where cashflows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank. This is reflected in holdings of reserves in excess of the central bank's required reserves. Transitional economies, for example, often attract large capital inflows as the economy opens and undergoes privatization. The effect of these inflows on liquidity is often magnified by central bank intervention in the foreign exchange market when there is upward pressure on the domestic currency. In the wartime economy, consumption is restricted and large amounts of involuntary savings accumulate until goods and services eventually become more widely available. Soviet-style economies have displayed widespread shortages and administered prices. This creates a situation of repressed inflation, whereby prices are too low relative to the money stock, leaving individuals with excess real balances. The importance of surplus liquidity for central banks is threefold and lies in its potential to influence: (1) the transmission mechanism of monetary policy; (2) the conduct of central bank intervention in the money market, and (3) the central bank's balance sheet and income.
