Many central banks around the world are gradually shifting from a system of direct controls towards the implementation of monetary policy through market-oriented instruments. However, some traditional market-based instruments, such as outright open-market operations, cannot be immediately used as the main instruments for monetary management in most developing countries and economies in transition, because a number of prerequisites are not fulfilled. In the transition period, refinance instruments may be valuable for the flexible implementation of monetary policy.
This paper first reviews the use of refinance instruments in a sample of industrialized countries. Typically, central banks offer standing facilities, that is, instruments used at the initiative of banks that carry preannounced rates. However, over the last decade monetary management has increasingly relied on operations with money market instruments. Because these operations are done at the initiative of central banks, operate through market mechanisms, and serve to manage the global amount of liquidity in the system, they are ideal tools for central bank management of monetary policy.
The joint implementation of standing facilities and money market instruments allows central banks to make the monetary policy stance explicit, as well as to fine-tune short-term interest rates. Although the quantitative importance of standing facilities has diminished in recent years, they play an important role as an instrument of emergency funding to finance end-of-day imbalances. However, central banks rely predominantly on money market instruments to regulate the overall liquidity in the system. In cases in which refinance windows are operated at below market rates, they provide very limited amount of funds; in some cases they can be seen as a counterpart to high non-remunerated reserve requirements.
Among the many lessons it details, the paper identifies the usefulness of central bank rates, whose level is decided by the central bank. The experiences of the selected countries suggest also that the instruments designed to provide the secular amount of central bank refinancing cannot be used to fine-tune interest rates. The design of refinance instruments has to take into consideration the exchange rate regime, and should provide incentives to trade funds on the interbank market initially. Finally, the paper identifies reasons for the use of collateralized operations, and presents some conclusions on the use of the reserve requirement.