Front Matter Page
Monetary and Exchange Affairs Department
Contents
Summary
I. Introduction
II. Overview of Monetary Policy Instruments
III. Open Market Operations
IV. Standing Facilities
V. Minimum Reserves System
VI. Lender of Last Resort
VII. Payment System Issues
A. TARGET
B. Pricing
C. Intraday Credit
D. Opening Hours
E. Role of the European Central Bank
VIII. Collateral Issues
A. Eligibility of Collateral
B. Transfer of Collateral
IX. Conclusions
Text Tables
1. ESCB/ECB Operating Procedures
2. Characteristics of Eligible Assets
References
SUMMARY
The European Monetary Institute (EMI) has been working with national central banks of the European Union to identify and prepare the set of instruments that may be used in the operation of monetary policy in Stage 3 of European Economic and Monetary Union (EMU), scheduled to start at the beginning of 1999. The EMI has only advisory powers and thus can be definitive in the choice of monetary instruments only where there is consensus; final decisions will be made once the European Central Bank is established. Some of the operational modalities also remain to be decided. Nevertheless, considerable progress has been made, and the EMI has in the past few months provided detailed guidance in a number of publications as to how monetary policy is likely to operate.
This paper briefly summarizes the arrangements. In many respects they will represent the state of the art in the conduct of monetary policy, and they reflect the intensive efforts of the EMI and national central banks over the past few years. In a few aspects, however, the paper suggests that there is scope for refinement. For one thing, it will be important to include a wide range of counterparties even for fine tuning open market operations. Another major issue is whether reserve requirements will be imposed and, if so, whether relying on end-of-the-month data for assessing liability will lead to “window dressing” by the banks and distort both the statistics and the liability for reserve requirements. Third, how to use rate changes to signal monetary authorities’ intentions needs to be carefully considered in order to avoid ambiquity. Fourth, there remain issues concerning the relationship between the euro and non-euro countries in access to and use of the new pan-EU payment system, TARGET.