Hi, How can cash-flows between govt and private sectors impinge on the bank liquidity ?? Can anyone explain this with the help of an example Thank you
Hi. As an example think about the end-of-month payday. The governement pays its public sector employees. This generally is paid into individuals' bank accounts. The banks then suddendly find they have an excess of liquidity which they will seek to deposit back to the central bank (potentially bidding down interest rates). Private sector pay also flows into the banks (from other banks) and generates tax receipts for the government. The level of tax receipts relative to the government's expenditure on any day can also cause the government to have an excess/deficit of cash that it needs to deal with (potentially impacting on rates).
