Summary of WP/94/148: “The Coordination of Domestic Public Debt and Monetary Management in Economies in Transition--Issues and Lessons from Experience”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

The coordination of objectives, instruments, and institutional arrangements of public debt and monetary management assumes particular significance in economies in transition. Such coordination can be achieved either through the pursuit of joint actions to achieve commonly shared objectives or, where strict institutional separation of objectives, functions, and instruments exists, through the work of market forces. Because financial markets are underdeveloped In economies in transition, the objectives and operations of monetary and debt management cannot be strictly separated. Rather, the development of financial markets--along with monetary control--is a common objective linking the monetary and fiscal authorities.

In the process of financial market development, the relative roles of the monetary and fiscal authorities need to be delineated and developed in the areas of primary debt issuance, secondary market operations, and reserve money and government debt programming. This paper surveys the key institutional and operational arrangements for such delineation and coordination of functions. These include the role of debt and monetary management committees in coordinating objectives and instruments; procedures for sharing information on, and forecasting variations in, government cash balances; legal and administrative arrangements for limiting central bank credit to the government; rules and procedures for the treatment of central bank profits and losses; the appropriate division of debt-management responsibilities between various agencies; and the legal underpinning and institutional infrastructure for secondary markets in government securities.

These arrangements and structures will vary across countries depending on sociopolitical factors, efficiency considerations, policy objectives, and the stage of financial market development. Proper arrangements for coordination, however, play a key role in fostering financial market development in economies in transition. In such economies, with no secondary markets in government securities initially, primary market Issues of government debt are often used for monetary purposes, calling for much closer day-to-day collaboration between the monetary and fiscal authorities. The effective use of primary debt Issues for monetary management requires appropriate selling techniques and supporting use of other monetary instruments to both encourage market development and ensure monetary control. This coordinated development of primary market arrangements and market-based monetary management creates incentives for secondary markets to grow. The authorities can further encourage secondary markets in government securities by providing transparent and equitable system for regulating and supervising markets; developing an efficient clearing and settlement system; fostering an appropriate market micro-structure, including the role of “market-makers”; and managing market liquidity actively with market-based instruments.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund