Frameworks for Monetary Stability
Chapter

17 Reform of Monetary Instruments in Southeast Asia

Editor(s):
Carlo Cottarelli, and Tomás Baliño
Published Date:
December 1994
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Author(s)
ROBERT G. CARLING

Many of the developing countries of Asia have deregulated and developed their financial systems since the early 1980s. This trend has had important implications for the conduct of monetary policy. The previous reliance on direct instruments of monetary control, such as interest rate ceilings, credit controls and guidelines, and reserve requirements, gave way during the 1980s to a shift toward indirect instruments, such as open market operations in government and central bank securities.

This shift was both necessary (because financial sector deregulation deprived policymakers of direct controls) and desirable (because of the inefficiency of direct controls). However, the transition to indirect instruments has not been without difficulty and remains incomplete. Further refinement of indirect instruments would better equip monetary authorities to achieve their policy goals; it would also contribute to financial and capital market development by making the markets in short-term securities deeper and more liquid.

This paper examines the experiences of four ASEAN1 countries—Indonesia, Malaysia, the Philippines, and Thailand—with a view to distilling the lessons learned for themselves and others. As each has adopted a different approach, their experiences cover a broad spectrum and provide a good empirical basis for a discussion of the issues.

While the paper focuses on monetary instruments in isolation, it is recognized that their development and effectiveness depend importantly on the environment set by fiscal and exchange rate policies. The first section reviews the development of monetary instruments in each country during the 1980s, while the effectiveness of monetary policy in recent years is discussed in the second section. The final section explores the issues and general lessons highlighted by the experiences of the four countries.

Individual Country Experiences

Following Indonesia’s financial sector reforms of 1983, monetary policy relied heavily on operations in central bank obligations. Malaysia turned increasingly to indirect instruments in the latter half of the 1980s, but has relied on a wide range of instruments, including notably the shifting of government deposits between the central bank and commercial banks. The Philippines has a much larger and more developed government securities market than the other three countries and policy has relied mainly on operations in treasury bills since 1986, supplemented by operations in central bank bills. Thailand lagged behind the other countries in financial sector reforms and until recently employed a mix of direct and indirect instruments, but now emphasizes repurchase market operations.

Indonesia

The critical turning point in Indonesia’s financial sector development occurred in 1983, when measures were taken to increase competition and efficiency and to develop the capital market; most importantly for monetary policy, direct controls on interest rates and bank credit were lifted and the coverage of the central bank’s liquidity credits facility2 was narrowed. Further reforms in 1988 involved, inter alia, a reduction in reserve requirements on banks, and in 1990 the central bank’s liquidity credit scheme was further reformed by reducing the number of eligible sectors and moving interest rates closer to market levels.

Interest rate and credit controls were replaced by open market operations. A critical factor in the choice of an operating instrument was the effective prohibition on domestic borrowing by the government under the “balanced budget” rule. Thus, there were (and still are) no government securities outstanding and Bank Indonesia introduced its own bills (Sertificat Bank Indonesia—SBIs) in 1984 to arm itself with an instrument of monetary control. These were first issued through a tap system, but later by daily or weekly auctions of a range of maturities. Thus, Indonesia became unique among the four countries under review in the weight placed on central bank securities in the conduct of monetary policy.

Bank Indonesia has remained reluctant to purchase SBIs prior to maturity, although during the mid-1980s SBI holders were, for a time, able to sell to FICORINVEST, a financial institution owned largely by the Bank. In order to develop a means of injecting bank liquidity in a more systematic fashion, in 1985 the Bank introduced the Surat Berhaga Pasar Uang or SBPU—essentially bank-endorsed commercial paper. The Bank uses purchases of SBPUs as its instrument for adding reserves. Trading in SBPUs was initially undertaken by FICORINVEST, which was allowed to rediscount its SBPU purchases through a special credit line to the Bank, but that credit line was eliminated in 1987. In recent years, the Bank has purchased SBPUs in daily auctions similar to those held for SBIs.

Malaysia

Financial sector deregulation began in Malaysia in 1978 with the freeing of bank interest rates, although the central bank continued to set ceiling rates and quantitative credit guidelines for priority sectors. Partial re-regulation of non-priority-sector lending rates occurred in 1983, when they were anchored to banks’ base lending rates (BLRs),3 and in 1987, when a ceiling of 4 percentage points was imposed on the margin above the BLR. In other respects, however, financial sector reform accelerated from the mid-1980s and the use of new instruments expanded rapidly. The coverage of priority sector controls was reduced. The government securities market, which had featured below-market yields and captive buyers, was reformed in 1987 (adoption of market-based coupons and establishment of a repurchase market) and 1989 (adoption of a panel of principal dealers and issuance by auction). The Kuala Lumpur Interbank Offered Rate (KLIBOR was established in 1987 as the linchpin of the short-term money market and as a reference rate for credit and variable savings instruments.

Against that background, Bank Negara turned increasingly toward indirect instruments of monetary policy during the 1980s. However, it continues to use a mix of monetary control techniques, including changes in statutory reserve requirements and, in early 1994, a redefinition of eligible assets and a directive to banks to redeposit with the Bank their non-interest-bearing accounts of foreign institutions. Open market operations have long included foreign exchange swaps with commercial banks and “recycling” of government deposits between Bank Negara and commercial banks. Increasingly since the mid-1980s, the Bank has also used operations in repurchase agreements, sale and purchase of government securities, borrowing from banks on the interbank market, occasional issuance of central bank certificates and bills, and recycling of Employee Provident Fund deposits.

The feature of monetary operations that distinguishes Malaysia from the other countries, apart from the variety of instruments used, is the “recycling” of government deposits. As such deposits account for more than 10 percent of the financial system’s total deposit base, control over the allocation of such deposits between Bank Negara and the commercial banks gives the Bank important leverage over bank reserves. Bank Negara has authority to shift deposits in accordance with monetary policy objectives, and uses an auction system to determine the allocation of deposits among banks.

Philippines

The Philippines embarked on comprehensive financial sector reforms in the early 1980s, including interest rate liberalization in 1981–83. Economic and political crises, however, prevented the reforms from taking root until the latter half of the 1980s and had important implications for monetary policy. As the treasury bill market was disrupted in 1983–85, central bank bills temporarily became the main instrument of monetary policy until 1986, when they were phased out and replaced by treasury bill operations. Constraints on the issue of treasury bills led to a resumption of central bank bill operations in 1990 to supplement treasury bill operations, as the upsurge in capital inflows heightened the problem of liquidity control. Following a financial restructuring of the central bank in late 1993, monetary policy is once again being implemented through treasury bill operations.

Prior to the 1993 restructuring, treasury bills were issued at auctions, with the price being freely determined and the quantity determined by a coordinating committee of central bank and government representatives in accordance with budget financing and monetary policy requirements. In the event that monetary policy required more securities to be issued than necessary for budget financing (which has often been the case in recent years), the excess was deposited with the central bank and, by agreement, was not available to be drawn down by the government to finance future deficits. The extent of remuneration on these fixed deposits was subject to discussion between the central bank and the Ministry of Finance; in recent years, interest was waived on some deposits in view of central bank losses. There is an active secondary market, but the emphasis of monetary policy was on the primary issue market. However, the central bank supplemented primary issues with occasional intervention in the repurchase market to influence bank liquidity. Adjustments to statutory reserve requirements were also used.

The recent restructuring of the central bank will have a significant effect on monetary operating procedures. Treasury bill auctions will henceforth be aimed solely at financing the budget, while responsibility for monetary policy has been assigned to the new central bank, which has been allocated a large portfolio of treasury bills for this purpose.

Thailand

Thailand lagged behind the other three countries in financial sector reform but embarked on a wide-ranging reform program in 1990. As a result, interest rates have been fully deregulated, reserve requirements have been revised, and little use is now made of sectoral credit guidelines or central bank rediscounting. Accordingly, the emphasis of monetary policy has shifted from direct to indirect instruments. The interbank market is well developed and a repurchase market for government bonds has existed since 1979 but for many years was not actively used. Since 1987, Bank of Thailand operations in the repurchase market have been the main indirect instrument of liquidity control. For a brief period in the late 1980s, they were supplemented by issuance of Bank of Thailand bonds.

Despite the existence of the repurchase market, monetary policy suffers from a relative lack of market-oriented instruments. In particular, government securities are in short supply as the budget has not been in deficit for several years, and the limited quantity of securities on issue has tended to be tightly held by banks to satisfy regulatory requirements. There is virtually no secondary market in government securities. Moreover, the central bank’s role as a principal in repurchase transactions has stunted the development of the repurchase market.

The urgency of developing new instruments of monetary policy has hitherto been reduced by the maintenance of a firm fiscal policy stance. Indeed, fiscal policy has carried much of the burden of liquidity control by running budget surpluses. However, this is a difficult role for fiscal policy to sustain in a country such as Thailand, where the pressures for more government spending on infrastructure and education are strong. The That authorities now attach high priority to the development of the government securities market as a vehicle for open market operations. The volume of securities available for market trading has increased as a result of the recent abolition of the bond holding requirement that was a condition for the opening of bank branches.

Monetary Policy Effectiveness

There is no simple measure of the effectiveness of monetary policy under a regime of market-based instruments. However, an examination of the growth rate of the monetary base and contributing factors provides a framework for consideration of monetary shocks in the four countries, and of how policy has dealt with them. In each of the countries under review, growth of the monetary base is one of the most important factors monitored by the authorities in setting monetary policy. Accordingly, this section examines factors affecting growth of the monetary base in each country, and how monetary policy has operated within that framework.

The key policy challenge in Indonesia in recent years was the upsurge in capital inflows, which began in 1990 and did not moderate until 1993. The resulting balance of payments surpluses generated a very rapid buildup of Bank Indonesia’s net foreign assets (Table 1). Policy aimed to neutralize a substantial part of the impact on the monetary base through open market operations, a tightening of liquidity credits, and some shifting of public sector deposits.

Table 1.Indonesia: Factors Affecting Reserve Money, 1986–93(12-month change as a percent of reserve money at beginning of period)
198819891990199119921993
FactorMarchMarchMarchMarchMarchMarchSept.
Net foreign assets39.7–26.79.294.354.771.925.2
Net claims on government22.38.56.6–51.4–4.48.912.0
Other claims20.72.0–3.0–2.60.81.6–10.2
Liquidity credits3.631.641.0–39.06.8–3.7–6.3
SBIs–7.6–17.61.7–69.0–16.6–80.5–5.1
SBPUs2.30.562.5–23.6–10.8–2.8
Net other items–64.6–3.4–37.57.615.019.98.9
Reserve money14.0–3.318.65.433.07.321.7
Memorandum item:
Broad money25.223.945.726.024.222.220.5

The impact of open market operations can be seen in the large negative contributions to reserve money growth from the SBIs and SBPUs in 1991–93. The one exception to this pattern is the large positive contributions from SBPUs in 1991, which reflected SBPU purchases by the central bank in order to cushion the effects of a large, onetime conversion of public enterprise deposits from commercial banks into SBIs. The much reduced, and sometimes negative, contributions from liquidity credits in 1991–93 resulted from a change of policy in 1990 that narrowed the scope of liquidity credits and reversed the rapid growth of such credits evident in 1988–90.

Monetary policy succeeded in limiting growth of the monetary base to an average of 15 percent in 1991–93, albeit with considerable year-to-year fluctuations. In accomplishing this task, open market operations were assisted by the tightening of Bank Indonesia’s liquidity credits and the shifting of public sector deposits from commercial banks into SBIs. While the overall effectiveness of monetary policy may be considered to have been mixed, in that monetary growth has been volatile, it must be noted that policy faced a great challenge from the sheer scale and volatility of capital inflows.

In Malaysia, the experience of large capital inflows and rapid growth of the central bank’s net foreign assets began earlier, in 1989. The mix of policy responses can be partly seen in Table 2. The effect of shifts in public sector deposits from the commercial banks to Bank Negara is apparent in the consistently negative contribution of net claims on government in 1989–93. With the exception of 1990, however, this effect has not been large. Operations in Bank Negara securities have also had a relatively minor effect. The largest neutralizing effects came from Bank Negara’s money market operations vis-à-vis the commercial banks in 1989 and 1992, in the form of borrowings on the interbank market. Other instruments employed included repurchase and government securities market operations and increases in the statutory reserve requirement (SRR) in 1990, 1991, 1992, and 1994.4

Table 2.Malaysia: Factors Affecting Reserve Money, 1988–93(12-month change as a percent of reserve money at beginning of period)
1993
Factor19881989199019911992March
Net foreign assets–10.327.934.818.274.675.0
Net claims on government0.6–4.9–19.6–9.5–5,0–8.2
Claims on banks4.5–26.225.316.6–77.1–61.2
Bank Negara certificates6.7
Net other items17.124.217 6–6.320.38 3
Reserve money11.927.722.919.012.813.8
Memorandum item:
Broad money8.720.119.613.718.015.1

After growth of the monetary base surged to 28 percent in 1989, monetary operations steadily forced this growth rate back to 13 percent by 1992, when domestic demand and inflation moderated. This was achieved through the pragmatic use of a mix of market-based instruments, rather than by concentration on any single instrument.

Monetary policy in the Philippines has struggled in recent years to manage the monetary implications both of large public sector deficits and, after 1990, large capital inflows and balance of payments surpluses. The authorities have targeted base money, but at times monetary policy has been relaxed out of concern over high interest rates and the interest cost to both the budget and the central bank from sterilization operations.

Until the end of 1993, when the central bank was financially restructured, treasury bill issuance carried the main burden of monetary policy. The placement of excess treasury bill proceeds on deposit with the centra] bank was reflected in sizable negative contributions to reserve money growth from public sector net credit (Table 3). In addition, reserve requirements were raised several times in 1990 to the legal maximum of 25 percent in December 1990, but they have since been reduced to 22 percent in order to lower the unusually high intermediation costs. Sales of central bank securities resumed in late 1990 and, together with treasury bill issuance, had a large negative impact on reserve money growth in 1991–93. In overall terms, open market operations succeeded in curbing the growth of the monetary base to an average of 18 percent in 1990–91 and 10 percent in 1992–93.

Table 3.Philippines: Factors Affecting Reserve Money, 1988–93(12-month change as a percent of reserve money at beginning of period)
1993
Factor19881989199019911992June
Net foreign assets20.623.3–3.340.882.572.4
Public sector net credit–32.6–19.66.9–10.5–49.7–48.9
RPs, CBCIs, central bank bills, reverse RPs11.74.90.9–46.2–26.6–19.2
Net other items26.929.412.634.95.93.9
Reserve money16.638.017.019.012.08.2
Memorandum item:
Broad money23.125.918.714.313.613.4

RPs refer to repurchase agreements and CBCIs to central bank certificates of indebtedness.

RPs refer to repurchase agreements and CBCIs to central bank certificates of indebtedness.

Thailand’s heavy capital inflows and balance of payments surpluses since 1987 are reflected in a large contribution of net foreign assets to reserve money growth (Table 4). The central bank actively drained liquidity through government bond repurchase operations and, to a lesser extent, issues of central bank bonds. However, the main factor containing reserve money growth was a tightening of fiscal policy in 1988 and the subsequent maintenance of the tighter fiscal stance. Budget surpluses and the resultant buildup of government deposits with the Bank of Thailand offset a substantial part of the impetus to reserve money growth from net foreign assets in 1988–91. Fiscal policy slackened somewhat in 1992–93, but fiscal surpluses continued to generate increases in government deposits that helped to restrain the growth of reserve money in the face of further capital inflows. Reductions in commercial banks’ access to refinancing facilities at the central bank also had significant onetime restiaining effects on reserve money growth in 1989 and 1993. Overall, policy succeeded in containing growth of the monetary base and eliminating overheating of the economy, but the greatest share of the work was done by fiscal policy rather than monetary instruments.

Table 4.Thailand: Factors Affecting Reserve Money, 1988–93(Change as a percent of reserve money at beginning of period)
Factor198819891990199119921993
Net foreign assets48.274.862.556.335.144.3
Net claims on government–44.0–40.4–22.7–33.2–10.4–8.9
Net claims on financial institutions14.7–11.31.5–1.91.4–5.3
Central bank net repurchase position1.5–2.88.5–4.61.5
Net other items–5.6–3.4–31.3–3.2–9.7–14.0
Reserve money14.816.918.513.417.916.1
Memorandum item:
Broad money18.226.226.719.815.718.51

Year to October 1993.

Year to October 1993.

Issues in the Use of Monetary Instruments

The foregoing review of the four ASEAN countries’ experiences indicates that they have traveled a long way down the road of financial sector deregulation and reform of monetary instruments, but that the process is incomplete. The monetary authorities’ loss of direct control over such variables as interest rates and the volume of credit as a result of deregulation has been replaced by a degree of indirect influence on monetary conditions through open market operations affecting the monetary base and the demand for credit. However, there remain gaps in the monetary authorities’ capacity to operate through these channels, and they sometimes continue to resort to ad hoc methods and direct instruments. This section reflects on the issues raised by the four countries’ experiences and on the lessons learned for themselves and others, with particular reference to operations in government securities, central bank securities, and government deposits.

General Issues

There is an interdependent relationship between financial market deregulation and the reform of monetary instruments. On the one hand, the development of market-based instruments of monetary control must keep pace with deregulation if monetary policy is to be effective in a deregulated environment. Financial sector reform programs should take care at each stage to develop the markets, such as short-term money markets, on which open market operations depend. On the other side of the interdependent relationship, the use of market-based instruments of monetary policy can contribute to the success of deregulation by helping to deepen the short-term money and securities markets and enhance their acceptability to the private sector. At times in the four countries reviewed, deregulation has been allowed to outpace the reform of monetary instruments, and the authorities either have been left lacking or, under pressure of monetary shocks, have resorted to second-best techniques that do little to contribute to financial market deepening.

At the same time, expectations of the benefits from reform of monetary instruments must be tempered by consideration of the economic environment. While monetary policy has been undergoing the transition to indirect instruments, the environment in which policy operates has also changed and in some respects has become more challenging. For example, open market operations—or for that matter, any monetary policy instrument—will have difficulty dealing with the effects of sustained large fiscal deficits or balance of payments surpluses. In a number of countries, the combination of a high degree of capital mobility and fixed or sticky exchange rates has greatly diminished the effectiveness of monetary policy. For example, open market operations aimed at sterilizing the liquidity impact of large capital inflows are likely to be at least partly self-defeating as the increase in short-term interest rates attracts additional capital inflow, given a fixed exchange rate.

Government Securities

Government securities are traditionally the favored vehicle for open market operations. Their advantage lies in being widely held and available in large volumes, and in their role as the benchmark for other financial market instruments. In addition, the availability of deep and active secondary markets enables monetary operations to be conducted independently of debt management, which is a desirable feature for monetary policy autonomy. These features are, however, characteristic of well-developed government securities markets and are less prevalent in developing countries than in industrial countries.

Among the four countries surveyed, the Philippines relies most heavily on government securities in its monetary operations (viz. short-term treasury bills). As discussed in the preceding section, until recently the Philippine authorities mainly used the primary issue market rather than the secondary market. This arrangement places a premium on coordination between the monetary and debt-management authorities, and on arrangements to freeze in the central bank debt issue proceeds in excess of those needed to finance the budget deficit. Interest rates on treasury bills are freely determined, thus enhancing their acceptability in the marketplace. However, the effect of large treasury bill issues on interest rates has sometimes made the authorities unwilling to sell enough bills to meet monetary objectives. The fiscal cost of sterilization operations has also been a constraint in the Philippines. The interest cost of treasury bill issues has sometimes made the authorities reluctant to overfund the deficit for monetary purposes—i.e., sterilization of large capital inflows. While such reluctance is understandable in the context of a large fiscal deficit, policy also needs to consider the costs of failure to exercise adequate control of liquidity.

In other countries, the constraint on open market operations in government securities has been the lack of a well-developed market. This may result from a shortage of supply as a by-product of prudent fiscal policy (as in Thailand), from securities holding requirements imposed on financial institutions that result in the available supply being tightly held (such as the recently removed bond holding requirement on banks in Thailand), or from an institutional constraint on domestic debt issuance for deficit financing (as in Indonesia). In such circumstances, governments might consider issuing government securities with the objective of developing financial markets, even though security issues may not be needed for deficit financing.5 Also, monetary authorities might review the need for government securities holding requirements relating to financial institutions and might prudently broaden the range of assets permitted to meet liquidity ratio requirements. Repurchase markets in government securities may also help to substitute for outright purchase or sale operations. In the final analysis, however, monetary authorities may have to accept a shortage of government securities in the market and focus their attention on other instruments.

Central Bank Securities

As seen in the preceeding section, all four countries have used operations in central bank securities, but Malaysia and Thailand have done so only in an intermittent and ad hoc fashion to supplement other instruments. In Indonesia, in contrast, central bank securities have consistently formed the core of monetary operations, and in the Philippines they have been an important supplement to government securities.

Like secondary markets in government securities, central bank securities have the attraction of enabling monetary operations to be conducted independently of government debt-management operations. Even so, the monetary authority must take into account the volumes and types of securities the fiscal authority is issuing, as each authority is operating in the same segment of the financial market. If appropriately designed, central bank securities can serve the same monetary purposes as government securities.6

However, central bank securities suffer a number of disadvantages and are unlikely to contribute as much as government securities to the deepening of financial markets. Central banks’ overriding concerns are the implementation of monetary policy and the soundness of their own balance sheets. Whether the issuance of central bank securities in large volumes will be consistent with these objectives is an empirical question. Depending on each country’s circumstances, such securities may not need to be issued in large volumes or be widely held in financial markets, in which case they are unlikely to serve the same role as government securities in a well-developed financial market. Therein lies the key advantage of treasury instruments over their central bank counterparts.

As with government securities, the interest cost of central bank security issues (in this case, borne directly by the central bank) may be considered a constraint on the volume of securities sold. The adverse effect on a central bank’s profit and loss position could be significant where monetary policy is called upon to counter injections of liquidity from external account surpluses on the scale seen in several Asian countries in recent years. Certainly, in the Philippines the interest cost to the central bank has been a concern. The Philippines is, however, something of a special case because the interest cost has been super-imposed on central bank losses from other sources.7 In general, the interest cost needs to be kept in perspective.

First, if excess liquidity is a result of balance of payments surpluses and a central bank is accumulating foreign assets at the same time as it is incurring domestic liabilities, earnings on higher foreign reserves will provide some offset to the domestic interest cost. However, the rate of return may be lower than that on domestic securities and is subject to foreign exchange risk. Second, as the cost to the central bank will ultimately be passed on to the government through diminished central bank profits or even losses, the cost to the public sector is similar whether excess liquidity is absorbed through central bank securities or government securities. This is not to deny that losses will harm a central bank’s autonomy and prestige and that in some situations the specter of losses will be a constraint on the scale of operations through central bank securities. In such situations, it would be desirable for the burden of sterilization to be shared with government securities, or for other policy action to be taken, such as fiscal tightening or exchange rate appreciation.

The implementation of monetary policy through open market operations in Indonesia has encountered problems of a different kind. In selling SBIs, Bank Indonesia’s general practice was, until recently, to set a cut-off yield and allow demand to determine the volume issued. The effective targeting of the interest rate made it difficult, at times, for the Bank to achieve the desired liquidity effect. Beginning in 1993, however, it adopted a more flexible interest rate policy, which has allowed it to improve control over the volume of SBIs issued. Another problem in the past stemmed from the Bank’s self-imposed restraint in declining to purchase SBIs prior to maturity. Thus, operations in SBIs have tended to be one-sided, withdrawing but not injecting liquidity. Instead, Bank Indonesia has had to use purchases of SBPUs as its instrument for adding reserves to the banking system. The difficulty of coordinating operations in SBIs and SBPUs may at times have complicated the control of reserve money. The experience of Indonesia has shown that such problems are not intrinsic to open market operations and can be overcome by improvements in operating procedures.

Recycling of Government Deposits

Although recycling of government deposits is not a widely used tool, it is discussed briefly here because it is an important component of the Malaysian authorities’ monetary arsenal, and because the Malaysian experience may be of relevance to some other countries. The attraction of recycling of government deposits is that it is a convenient, quick, and accurate way of achieving a given change in bank reserves.8

However, there are several limitations. First, for active deposit management to be capable of having a meaningful impact, government deposits need to represent a significant fraction of the banking system’s total deposit base—a condition that is not satisfied in many countries. Second, arbitrary allocations and withdrawals of deposits by the central bank could be disruptive to individual banks’ liquidity positions. Bank Negara avoids this problem by allocating deposits to banks through an auction system that enables all banks to participate and ensures that the deposits go to the banks that most need them. Third, it is desirable that the central bank be given authority, as is the case in Malaysia, to determine the disposition of deposits between itself and the commercial banks in accordance with monetary policy objectives. Otherwise there would be scope for conflicting actions between the monetary and fiscal authorities.

References

    EmeryRobertF.“Central Banks’ Use in East Asia of Money Market Instruments in the Conduct of Monetary Policy,”International Finance Discussion Papers No. 426 (Washington: Board of Governors of the Federal Reserve SystemMarch1992).

    QuintynMarc and CatherineMcAuliffe“Government Deposits and Securities as Monetary Policy Instruments in the Transition to Indirect Policies—Merits and Coordinating Arrangements” (Washington: International Monetary FundOctober1993).

    SundararajanV. and LazarosMolho“Financial Reform and Monetary Control in Indonesia,”IMF Working Paper No. 88/4 (Washington: International Monetary FundJanuary1988).

    TalibA.Monetary Policy in the SEACEN Countries: An Update (Kuala Lumpur: The Southeast Asian Central Banks Center1993).

    TsengWanda and RobertCorkerFinancial Liberalization Money Demand and Monetary Policy in Asian Countries Occasional Paper No. 84 (Washington: International Monetary FundJuly1991).

This paper benefited from comments by Kenneth Bercuson, Joshua Felman, Aasim Husain, Lazaros Molho, and Tom Rumbaugh, all of the Southeast Asia and Pacific Department, International Monetary Fund.

Association of Southeast Asian Nations, comprising Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, Brunei and Singapore are excluded from this review as their experiences with monetary instruments are of less general relevance.

Under this facility, bank loans to selected priority sectors were eligible for rediscount (liquidity credit) from Bank Indonesia at highly subsidized rates and at varying rediscount proportions.

Since 1983, each bank has been required to declare a base lending rate (BLR), calculated from the bank’s cost of funds. From 1987 to 1991, the BLR of each bank was required to be no more than 0.5 percentage point above the BLR of the two leading banks Since 1991, banks have been allowed to quote their own BLR, based on a prescribed standard methodology.

The SRR was raised from 5.5 percent to 6.5 percent in 1990, to 7.5 percent in 1991, to 8.5 percent in 1992, and to 9.5 percent in 1994.

The Singapore Government has taken this course since 1987, despite running budget surpluses.

It is noteworthy that the Reserve Bank of New Zealand relies entirely on its own bills in the conduct of monetary policy. However, New Zealand also has a well-developed government securities market.

Mainly on exchange rate swap and forward cover arrangements that have significantly increased the central bank’s exposure to fluctuations in the peso exchange rate.

A shift of government deposits from the commercial banks to the central bank represents a reduction in the monetary base.

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