Back Matter

APPENDIX

Table 1.

Argentina: Factors Affecting Reserve Money

(In millions of australes)

article image
Sources: IFS. data provided by the authorities; and staff estimates.

Residual.

Includes refinance and rediscount facilities, loans to private and public enterprises, and other items.

Participations in the central bank’s holdings of government papers, issued in the form of central bank bills.

Table 2.

Brazil: Factors Affecting Reserve Money

(In billions of cruzados)

article image
Sources: IFS. data provided by the authorities, and staff estimates.

Nonfinancial public sector.

Residual.

Includes operations in treasury bills for monetary control purposes.

On a transaction basis; i.e., excluding valuation changes.

Includes refinance and rediscount facilities, loans to private enterprises, and other items.

Bank rate.

Table 3.

Indonesia: Factors Affecting Reserve Money

(In billions of rupiahs)

article image
Sources: Data provided by the authorities, and staff estimates.

On a transactions basis; i.e., excluding valuation changes.

Includes refinance and rediscount facilities, loans to private and public enterprises, and other items.

Central bank certificates.

Private sector money market papers.

Table 4.

Kenya: Factors Affecting Reserve Money

(In millions of shillings)

article image
Sources: IFS. data provided by the authorities, and staff estimates.

Residual.

Including treasury certificates used for monetary control purposes.

Including valuation changes.

Includes refinance and discount facilities, loans to private and public enterprises, and other items.

Treasury bill rate.

Table 5.

Malaysia: Factors Affecting Reserve Money

(In billions of ringgit)

article image
Sources: Data provided by the authorities, and staff estimates.

Residual.

Includes recycled government deposits and government securities used for monetary control purposes.

On a transaction basis, i.e., excluding valuation changes.

Includes refinance and discount facilities, loans to private and public enterprises, and other items.

Table 6.

Mexico: Factors Affecting Reserve Money

(In billions of Mexican pesos)

article image
Sources: IFS. data provided by the authorities, and staff estimates.

Public sector.

Residual.

Includes CETES used for monetary control purposes.

On a transaction basis, i.e., excluding valuation changes.

Includes refinance and discount facilities, loans to private enterprises, and other items.

Fixed deposits with or placements by the central bank.

Table 7.

Philippines: Factors Affecting Reserve Money

(In billions of pesos)

article image
Sources: Data provided by the authorities, and staff estimates.

Residual.

Including the government’s fixed deposits with the central bank, associated with the issuance of treasury bills.

On a transactions basis, i.e., excluding valuation changes.

Includes refinance and rediscount facilities, loans to private and public enterprises, and other items.

Repurchases/reverse repurchases, operations in central bank papers and treasury securities.

Treasury bill rate.

Table 8.

Sri Lanka: Factors Affecting Reserve Money

(In millions of rupiahs)

article image
Sources: Data provided by the authorities, and staff estimates.

Net of debt sinking fund.

Residual.

Includes operations in treasury bills for monetary control purposes.

On a transactions basis, i.e., excluding valuation changes.

Includes refinance and discount facilities, loans to private and public enterprises, and other items.

Central bank securities.

Treasury bill rate.

Table 9.

Thailand: Factors Affecting Reserve Money

(In billions of baht)

article image
Sources: IFS, data provided by the authorities, and staff estimates.

On a fiscal year basis, i.e., the year ending in September.

On a transactions basis, i.e., excluding valuation changes.

Includes refinance and rediscount facilities, loans to private and public enterprises, and other items.

Outstanding amount was 2.0 billion baht in the period June-October 1987.

References

  • Bank of England, “The Management of Liquidity,Bank of England Quarterly Bulletin. September 1982.

  • Bank for International Settlements, Changes in Money-Market Instruments and Procedures: Objectives and Implications. March 1986.

  • Bank for International Settlements, “Changes in Central Bank Money Market Operating Procedures in the 1980s,” BIS Economic Papers No. 23. January 1989.

    • Search Google Scholar
    • Export Citation
  • Bank Negara Malaysia, Money and Banking in Malaysia. Kuala Lumpur, 1984.

  • Binhadi and P. Meek, Implementing Monetary Policy in Indonesia,” Mimeograph, 1988.

  • Choksi, Armeane and Demetris Papageorgiou (ed.), Economic Liberalization in Developing Countries. Oxford, Blackwell, 1986.

  • Drake, P.J., Securities Markets in Less-Developed Countries,” Journal of Development Studies. January 1977.

  • Ealdama, E., Jr., The Auction Market for Treasury Bills,” Philippine Central Bank Review. December 1986.

  • Edwards, Sebastian, The Order of Liberalization of the External Sector in Developing Countries,” Essays in International Finance. No. 156, Princeton University, December 1984.

    • Search Google Scholar
    • Export Citation
  • Fama, E.F., Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance. May 1970.

  • Friedman, B., Targets, Instruments and Indicators of Monetary Policy,” Journal of Monetary Economics 1, 1975.

  • Gertler, Mark, Financial Structure and Aggregate Economic Activity: An Overview,” Journal of Money. Credit and Banking. Vol. 20, No. 3 (August 1988, Part 2).

    • Crossref
    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, Interest Rate Policies in Developing Countries. Occasional Paper No. 27, October 1983.

  • Johnston, R.B., The Demand for Non Interest Bearing Money in the United Kingdom,” H.M. Treasury Working Paper No. 28. February 1984.

    • Search Google Scholar
    • Export Citation
  • Johnston, R.B., The Demand for Liquidity Aggregates by the U.K. Personal Sector,” H.M. Treasury Working Paper No. 36. June 1985.

  • Johnston, R.B., Monetary Instruments and Targets Under Alternative Bank Market Structures in Liberal Financial Systems,” International Monetary Fund, DM/88/19, March 1986.

    • Search Google Scholar
    • Export Citation
  • Kornai, Janos, The Soft Budget Constraint,” Kyklos. Vol. 39, No. 1, 1986.

  • Leite, S.P., Notes on Open Market Operations in Mexico,” Mimeograph, July 1985.

  • Leite, S.P., and V. Sundararajan, Issues in Interest Rate Management and Liberalization,” Mimeograph, April 1988.

  • OECD, Prudential Supervision in Banking. Paris, 1987.

  • Mathieson, D.J., Exchange Rate Arrangements and Monetary Policy,” International Monetary Fund, WP/88/14, February 5, 1988.

  • Sprenkle, C.M. and M.H. Miller, The Precautionary Demand for Narrow and Broad Money,” Economica. Vol. 47, November 1980.

  • Sundararajan, V. and L. Molho, Financial Reform and Monetary Control in Indonesia,” (unpublished, International Monetary Fund, WP/88/4, January 20, 1988.

    • Search Google Scholar
    • Export Citation
*

An earlier version of this paper was presented to the Central Banking Seminar, December 1988. The authors wish to thank their colleagues, especially V. Sundararajan, for comments on an earlier draft, and Dawit Makonnen for research assistance. It is the intention to incorporate a version of this paper in a forthcoming Occasional Paper.

1/

Such systems are usually associated, to a greater or lesser extent, with substantial direct government intervention in other aspects of the economy through, for example, state ownership, price controls, or subsidies. The monetary control framework is usually part of a broader interlocking system of economic controls, the extreme case being that practiced in centrally planned economies where credit is allocated to support production plans, with no role for market processes.

2/

An example is where corporate entities purchase farms simply to avail themselves of access to preferential agricultural credits.

3/

See, for example, Korani (1986) for a discussion of soft budget constraints.

4/

For a discussion of the phasing of economic reform, see Edwards (1984).

5/

For a discussion of the implications of financial structure on the effectiveness of different monetary control instruments, see Johnston (1986).

6/

It is not necessary for all countries to have intermediate targets and the distinction between operational and intermediate targets may be blurred, e.g., when the target is interest rates or the monetary base.

7/

See, for example, Johnston (1985) for an examination of the impact of the liberalization of credit availability on the demand for financial assets in the United Kingdom.

8/

It is worth recalling that the stability of money demand has never been the sole reason for the selection of a particular target variable. Questions of controllability, interest sensitivity, the link of the monetary aggregates to other policy variables, and the ease with which the targets can be explained to the general public have also been important in this choice. There was, for example, much debate about the stability of the Ml aggregate in the United States long before its deemphasis in 1982; and the lack of evidence on the stability of the M3 aggregate did not prevent the U.K. authorities from using this as the only announced monetary target until 1982.

9/

For a discussion of issues in phasing, see the volume edited by Choksi and Papageorgiou (1986).

10/

A detailed description of recent developments in monetary control procedures in G-10 countries can be found in Bank for International Settlements (1989).

11/

The Group of Ten countries are Belgium-Luxembourg, Canada, France, Italy, Japan, the Netherlands, Sweden, the United Kingdom, the United States, and West Germany.

12/

One or two countries also have carry-over provisions for reserve surplus or deficiencies from one reserve holding period to another.

13/

The bond repurchase market in Thailand, discussed in subsequent sections, is a case in point.

14/

This assumes a uniform reserve ratio is applicable to all bank deposits.

15/

The following analysis is in terms of the deficiency in desired holdings rather than required holdings. Since desired holdings include a precautionary reserve, the implications for interest rates, etc. are likely to be different when dCBD>dCBS > αdD* and dCBS < αdD* We have not distinguished these circumstances in the text, which is intended only as a stylistic treatment.

16/

The need to resort to the central bank for marginal accommodation may occur before aggregate shortages emerge in reserves if the interbank system is weak.

17/

Sometimes a distinction is made between “defensive” central bank operations, which are designed to offset the impact of autonomous influences on the supply of reserves, and “dynamic” operations, which are designed to bring about changes in the supply of reserves.

18/

Many countries also include net or gross interbank positions, but these can have serious disadvantages. The use of gross interbank positions allows for considerable slippage in the liquid asset ratio since such positions can be easily created; while the use of net positions can inhibit interbank borrowing and development of the interbank market.

19/

For a discussion of the use of liquidity norms, see Bank of England (1982). Also see OECD (1987) for a more general description of the use of liquid assets among OECD countries.

20/

However, this may require a change in banking regulations, since eligibility to be counted toward meeting liquid asset requirements may require assets to be unencumbered.

21/

In one of the countries surveyed in section 6, Indonesia, primary bill auctions have in fact been operated daily, but have been restricted to money market participants.

22/

The use of averaging also reduces the scope for “window dressing” operations that can weaken the impact of the reserve ratios and monetary control procedures.

23/

For a theoretical treatment of the optimal holding of precautionary balances in the face of uncertainty, see Sprenkle and Miller (1980), and for an application to banks’ holdings of excess reserves, see Johnston (1984).

24/

This loan rate could be determined as the latest rate at the primary issue plus a margin.

25/

Penalties associated with borrowing from the central bank may reflect quotas that restrict access, rather than specifically posted penal rates.

26/

Whenever there is a persistent cash shortage, interbank rates would rise to the penal loan window rate and when there is a persistent cash surplus, interbank rates would fall toward zero.

27/

This would, anyway, be a step toward removing the tax imposed by non-interest-bearing reserve requirements, which widen interest margins and cause disintermediation.

28/

In principle, direct intervention in the unsecured interbank market, or auctioning of deposit placements, or other similar devices are possible for day-to-day control. The choice would depend upon the institutional circumstances.

30/

The exceptions are Malaysia and Thailand. These countries have auctioned treasury bills, but have not varied the auction amount to influence monetary conditions.

31/

Indonesia has reduced its reserve ratios substantially and Malaysia has reduced and unified reserve and liquid asset ratios.

32/

Discussions of financial reform in Indonesia are given in Binhadi and Meek (1988) and Sundararajan and Molho (1988).

33/

These banks had accounted for the bulk of commercial banks’ assets and deposits.

34/

Intermediate targets for monetary aggregates and for base money have also been employed.

35/

Bills of 15-day maturity were also issued for a brief period in 1984-85.

36/

These auctions—telephone go-arounds—are conducted through FICORINVEST.

37/

Bank Negara Malaysia (1984) describes the financial system and monetary policy in Malaysia.

38/

Traditionally, long-term interbank rates were used as the operating target; more recently overnight interbank rates have also been taken into account.

39/

The auctions, which were introduced in 1973, have been conducted on a weekly basis, with 91-day bills offered every week, 182-day bills every second week, and 364-day bills every four weeks. The amounts and maturities to be offered are announced in advance of the auction; results regarding, inter alia, amounts tendered, accepted and rejected, and yields are announced after the auction. Given the captive holding requirements, the treasury bill yields do not properly reflect money market conditions.

40/

Commercial banks, finance companies and some other financial institutions have access to the regular discount window, and may rediscount treasury bills and other eligible short-term papers—such as 3-month commercial papers and 6-month promissory notes issued to finance agriculture- -at the discount rate. Under the export refinance facility, to which only commercial banks have access, credit is extended for periods of up to three months at preferential interest rates. In addition, an automatic overnight discount window is established to facilitate the day-1 clearing introduced in February 1987, and funds are lent against the collateral of government securities at the average of overnight interbank rates during the day.

41/

An overview of open market-type operations in Mexico is found in Leite (1985).

42/

Base money is defined as reserve money plus banks’ holdings of reserve eligible securities and reserve deficiencies.

43/

See Ealdama (1986) for a description of the auction system.

44/

Most outstanding credits have been for export refinancing.

45/

The major priority sectors are exports, agriculture, crop financing and price support, and agribusiness.

46/

Bills are auctioned on a weekly basis and are purchased mainly by financial institutions, to satisfy statutory requirements. Between auctions the central bank usually stands ready to sell bills from its portfolio and has occasionally purchased bills before maturity.

47/

The time elapsed may have been too short for market participants to have fully adjusted to the new environment; moreover, markets may have been buffeted by changing inflationary expectations, fiscal uncertainties, and external conditions during this time.

48/

These latter regressions are motivated by the efficient markets hypothesis of interest rates, which suggests that short-term interest rates would tend to follow random walks; see, for example, Fama (1970).

49/

For Argentina and Sri Lanka, there is a lack of a consistent time series for interest rates; for Brazil, a reorganization of the monetary authorities led to a break in the time series on reserve money; and in the cases of Kenya and Mexico, there are no decisive reform measures which would represent a clear shift in operating procedures.

Monetary Control Procedures and Financial Reform: Approaches, Issues, and Recent Experiences in Developing Countries
Author: International Monetary Fund