Copyright
© 1995 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
The adoption of indirect instruments of monetary policy / by a Staff Team headed by William E. Alexander, Tomás J.T. Baliño, and Charles Enoch.
p. cm. — (Occasional paper, ISSN 0251-6365 ; 126)
Includes bibliographical references.
Contents: pt. 1. Issues and overview—pt. 2. Case studies.
ISBN 1-55775-489-6
1. Monetary Policy—Developing countries—Case studies.
2. Monetary policy—Case studies. I. Alexander, William E. (William Edward), 1936- . II. Baliño, Tomás J.T. III. Enoch, Charles. IV. Series: Occasional paper (International Monetary Fund) ;
no. 126.
HG1496.A36 1995
332.4’6’091724—dc20
95-19313
CIP
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Contents
Preface
Part I Issues and Overview
I Introduction
II Direct and Indirect Monetary Instruments
Modes of Operation
Specific Instruments: Advantages, Disadvantages, and Operational Issues
III Issues in the Reform of Monetary Instruments
Roles of Different Indirect Monetary Instruments
Case for Adopting Indirect Instruments
High Cost of Utilizing Direct Instruments
Advantages of Indirect Instruments
Inherent Complexities in the Use of Indirect Instruments
Criteria for Determining the Instrument Mix
IV Transition to Indirect Instruments: Selected Experiences
Experience of Industrial Countries
Context of the Transition
Brief Overview
Problems with Transition
Experience of Selected Developing and Transition Economies
Analytical Focus
Institutional and Macroeconomic Factors at the Outset of the Reform
Implementation Experience
Use of Monetary Policy Instruments
Financial Sector Efficiency and Monetary Control
V Implications for the Adoption of Indirect Instruments
Concomitant Reforms
Insulate Monetary Policy from Deficit Financing
Strengthen and Integrate Money Markets
Restructure the Banking System and Foster Competition
Adapt Supervisory and Regulatory Framework to Market Conditions
Bolster the Technical Capacity of the Central Bank
Pace of Transition
Sequencing
Initial Stage
Second Stage
Third Stage
VI Implications for Fund Operations
Program Design
Role of Technical Assistance
VII Conclusions
Part II Case Studies
I Introduction
II Chile
III Egypt
IV Ghana
V Indonesia
VI Mexico
VII New Zealand
VIII Poland
Tables Section
II
1. Direct Instruments of Monetary Policy—Overview
2. Indirect Instruments of Monetary Policy—Overview
III
3. Instrument Mix and Operation for Selected Countries
IV
4. Initial Conditions in Selected Countries in Transition to the Use of Indirect Instruments
5. Features of the Transition to the Use of Indirect Instruments in Selected Developing Countries
6. Use of Monetary Instruments in Selected Countries at the End of the Transition Period
7. Trends in Financial Variables Between Pre- and Posttransition Periods
8. Trends in Monetary Indicators
Chart Section V
1. Transition to Indirect Monetary Instruments
References
The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1991–92 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
The introduction and refinement of indirect instruments of monetary policy have been elements of many IMF-supported programs in recent years. This paper reviews experiences in a number of countries that have adopted these instruments to obtain insights on the appropriate design of indirect instruments and to identify the supporting policies that are important for these instruments to function properly. It focuses on the transition from direct to indirect instruments and considers the speed of transition in different countries and the sequencing of the reform measures.
The paper also describes how implementing indirect instruments affects the design of monetary policy. It seeks to identify issues regarding the integration of the technical aspects of the operation of monetary policy into the design of IMF-supported programs and the exercise of surveillance as well as the role of technical assistance.
The authors would like to thank Manuel Guitián and J.B. Zulu for their encouragement and support of this project, colleagues in the Monetary and Exchange Affairs Department and other departments of the IMF, and the members of the Executive Board for valuable comments and stimulating discussion. Rozlyn Coleman and Elisa Diehl of the External Relations Department edited the paper for publication and coordinated production. The views expressed here are the sole responsibility of the authors and do not necessarily reflect the opinions of the Executive Directors of the IMF or other members of the IMF staff.