III Issues in the Reform of Monetary Instruments
- Tomás Baliño, Charles Enoch, and William Alexander
- Published Date:
- July 1995
Monetary policy is a major component of economic policy in market economies and an important part of IMF-supported adjustment programs. The central bank in most countries is assigned the primary responsibility for conducting monetary policy and often for formulating it. In addition, some auxiliary functions of central banks—notably, promoting the development of the money market, safeguarding the payments and clearing system, and performing bank regulation and supervision—support the main function.
The basic policy objective of a central bank operating in a market economy with its own currency is now generally considered to be the stability of the nation’s currency in the medium term.3 This represents an evolution from past practices, which gave more prominence to other objectives of monetary policy—including rapid economic growth and a low unemployment rate. In practice, attempts to use monetary stimuli to promote economic growth directly frequently ran into problems. Typically, the stimuli increased the rate of growth in the short run at the cost of an undesirable rise in inflation, balance of payments difficulties, and a lower rate of growth in the longer run. Hence, during the past decade, there has been increasing agreement that monetary policy can best promote medium- and longer-term growth by maintaining overall price stability.
However, the central bank is also concerned with the stability and efficiency of the financial sector. As the leading financial institution, it is concerned with the efficiency of intermediation between savers and investors, which takes place via the financial system and contributes to economic growth.4 Moreover, the structure and development of financial markets affect the transmission and impact of central bank policies, which are implemented through those markets. Indeed, in view of these operational linkages, significant changes to the monetary policy framework require parallel measures aimed at the structure and development of financial markets. Full open market operations do not work well, for example, unless the money and interbank markets function effectively.
Roles of Different Indirect Monetary Instruments
In industrial countries with highly developed primary and secondary markets, open market operations with treasury bills or central bank bills have become the instrument of choice. Open market operations involve either direct purchases and sales of securities or repurchase agreements (repos) and reverse repurchase agreements for financial instruments.5 However, the development of active financial markets is a complex process. In addition to competitive financial institutions, substantial infrastructure must be developed, including large-value transfer systems, book-entry systems for recording ownership transfers, and a sophisticated legal and regulatory framework. Once these transformations have been achieved, open market operations can be a highly effective and flexible tool of monetary policy.
If financial markets are sufficiently deep, the central bank can largely rely on open market operations to affect the overall level of liquidity. In this environment, banks generally meet their individual liquidity needs through the market.6 However, when there is a liquidity shortage in the system as a whole, those banks unable to meet their liquidity needs in the market borrow from central bank windows. In fact, in some countries, the central bank deliberately creates a liquidity shortage to induce banks to borrow from the central bank. The conditions of such borrowing are a key tool of monetary policy.
Countries with underdeveloped financial markets can conduct open market type operations through central bank interventions in primary markets for securities. A common form of this approach is to hold regular auctions of treasury or central bank bills and to vary the net amount auctioned in order to influence bank reserves. Often, this instrument is used in combination with several other tools, including auctions of central bank credit, use of rediscount facilities, and changes in reserve requirements, in order to achieve the desired reserve impact and smooth day-to-day liquidity fluctuations.
While auctions of treasury bills or central bank bills are used to absorb liquidity, the central bank also needs a complementary instrument to inject liquidity at its initiative. In countries where the depth of the money market is limited, the latter is usually achieved through central bank credit auctions. Assuming the existence of a suitable security (such as commercial bills or some form of government paper), auctions of repo contracts are also a possibility. Central bank credit auctions can be considered a transitory tool until other instruments are established. They allocate central bank credit at market terms and provide the financial system with a benchmark interest rate. However, they potentially carry an adverse selection risk—riskier borrowers bidding up interest rates to get a larger share of credit—and expose the central bank to credit risks that are difficult to assess, as counterparties may fail and adequate collateral in the form of quality securities may be unavailable.7
Rediscounts and other forms of central bank credit to the banking system have been used for three different purposes: to relieve liquidity shortages (lender-of-last-resort function), to control monetary and credit conditions, and to allocate credit selectively. In the operation of a discount facility, central banks typically limit access in various ways, either administratively or through adjusting the interest rates on central bank loans.8 Some central banks rely on the market to limit access, in which case the central bank lending rate needs to be high enough to ensure that, as a first resort, banks seek to obtain funds from other sources, such as deposits and the interbank market. Others, such as the Federal Reserve and the Bundesbank, maintain the discount rate somewhat below market levels and thus have to limit access to the facility administratively.9 More generally, central banks have to ensure that their lending rate is not so low as to open up arbitrage profits—for example, by borrowing from the central bank to buy risk-free treasury bills.
Some central banks use changes in the discount rate primarily for their announcement effect—as a way of signaling to the market that a change in monetary policy is occurring and that it will be either more or less difficult to obtain funds from the discount window in the future. Other central banks use the discount window as their main instrument to influence money market conditions. They do so by using other instruments (such as sales of treasury bills) to create a systemic shortage of reserve money, which compels banks to borrow from the central bank. Also, in situations where central banks play a large intermediation role through the extension of credit to commercial banks or to the government, instruments to absorb reserves are likely to be the key instruments, thus reducing the role of the discount window.
Reserve requirements directly link central bank and commercial bank liabilities. They can be used as a means of sterilizing excess liquidity. However, they introduce a distortion, insofar as unremunerated reserve requirements are equivalent to a tax on financial intermediation. Thus, required reserves can encourage financial disintermediation if they are above the level banks normally would hold voluntarily (and are not remunerated at the market rate). An additional problem is that reserve requirements lack flexibility. Frequent changes in these requirements—particularly increases—would be disruptive and costly for banks.10 Furthermore, reserve requirements cannot be used to mop up excess reserves if the latter are unevenly distributed among banks and there is no effective means for banks to redistribute reserve balances among themselves.
In industrial countries, the set of instruments used varies considerably. There has been a tendency to rely more on open market instruments that operate at the initiative of the central bank and less on central bank lending that operates at the initiative of commercial banks as the primary instrument. While most central banks still impose reserve requirements, they rarely change them, and there has been a tendency to lower or eliminate such requirements.11
Case for Adopting Indirect Instruments
The historic popularity and ongoing reliance in many countries on direct methods of monetary control are based on certain appealing characteristics that they exhibit. First, direct instruments are perceived to be reliable, at least initially, in controlling credit aggregates or the distribution of credit and its cost. Moreover, they seem to have performed well, at least in some industrial countries, until the mid-1980s without any immediately apparent negative side effects. Second, they are relatively easy to implement and explain to politicians and the public. Third, their direct fiscal costs are relatively low. Fourth, they are easy to link to a monetary programming format. Fifth, direct controls are attractive to governments that want to channel credit to specific objectives. Sixth, in countries with a rudimentary and noncompetitive financial system, direct instruments may be the only feasible monetary policy instrument until the institutional framework for indirect instruments has been developed. Seventh, during the transition to indirect monetary control, financial markets may be too thin, resulting in strong interest rate effects and volatility, which many governments fear will discourage investment. Central banks may therefore maintain some direct instruments for an interim period until financial markets are sufficiently developed. Eighth, if there is no alternative domestic source of credit, bank-by-bank credit ceilings work regardless of the exchange rate regime. And ninth, direct instruments can, at least temporarily, be attractive as a second best or supplemental instrument in situations of severe specific or general market failures, for example, a severe crisis in the financial sector.12
High Cost of Utilizing Direct Instruments
Against these perceived advantages, however, must be set the costs of inefficient resource allocation and ineffectiveness arising from the evasion and inequity that direct instruments entail. Insofar as credit ceilings are based on amounts extended by particular institutions or are assigned to finance specific sectors as of a certain base period, they tend to ossify the distribution of credit. For example, credit ceilings were often derived in proportion to a bank’s historical penetration in the credit market (as in Egypt. Ghana, and Jamaica). Such ceilings perpetuate market shares, independent of a bank’s competitiveness, and reduce the incentives for banks whose ceilings are binding to finance profitable projects. Insofar as state-owned banks dominated the banking sector in the past, this also tends to limit the inroads that the private sector can make in the banking industry.
Moreover, there is a tendency for direct controls to multiply, as the authorities struggle to thwart attempts at circumventing the initial ones. This is likely to be the case when controls lead to large distortions. In the case of Egypt, for example, interest rate controls ultimately had to be reinforced by the introduction of credit ceilings. Among other countries that also experienced a multiplication of controls when they relied on direct instruments are Argentina, France, and Hungary.
Direct instruments are often associated with attempts to micromanage monetary conditions by imposing a complex, tiered structure of interest rates and credit controls, causing yet further inefficiencies and distortions. This situation occurred in Kenya. Mexico, New Zealand, and Tunisia, among others. A good example of these attempts to micromanage monetary conditions is Indonesia, where in the year before the move toward indirect monetary control, there were more than twenty different categories of refinancing credits, each with its own interest rate.
Insofar as they are effective, direct controls may lead to an overhang of liquidity, financial repression, and disintermediation. Excess liquidity tends to build up because of limits imposed on bank lending, while deposit growth is fueled by an expansion of reserve money caused, for instance, by monetary financing of the deficit. The excess liquidity, in turn, entails an inflationary potential, for the time when the credit limits are eased. Financial repression may be caused by regulations that keep interest rates below their equilibrium levels. This can result in an unproductive use of savings and correspondingly low returns to saving; it can also result in a reduction of bank-based financial savings and a shift into other forms, including securities and real assets (such as has occurred in Japan, France, and the United States). To the extent that controls lead to disintermediation, the share of financial holdings over which authorities can exert monetary control falls, as savings flow into unregulated or informal financial markets. Such disintermediation typically takes the following forms: growth of fringe banks and “informal” lending; increased currency holdings of households and businesses; transfer of savings overseas; and holding of savings in the form of precious metals and consumer durables. In Ghana and Thailand, for example, disintermediation took the form of growth in the informal financial sector; in some other countries, including Egypt and Poland, disintermediation took the form of flight to foreign currency.
Under direct instruments of monetary control, the allocation of credit and its cost is arbitrary and may relate to nonmonetary objectives, such as the promotion of certain sectors of the economy. (The latter was the case, for example, in The Gambia, Indonesia, Malaysia, and Thailand.) However, direct instruments are an ineffective means for determining the final uses of credit, because the fungibility of money makes it impossible to ensure that the credit or the credit ceiling will be used for the intended purpose. While it is possible to determine if certain projects were funded, it is difficult to determine whether they would have been funded anyway. Moreover, direct instruments often lose whatever effectiveness they may initially possess with the passage of time. Experience shows that economic agents often find means to circumvent them, so that more and more economic activity occurs outside the formal financial system. There is evidence that banks themselves may attempt to circumvent direct controls by introducing new products or financing techniques that are outside the boundaries of existing controls or to divert funds into artificially profitable activities created by the controls themselves.13 When direct instruments are being circumvented, policy objectives are often defeated in practice, even if monetary targets are met. For example, if an increasing proportion of credit is extended outside the banking system—say, through the informal sector, on which reliable data cannot be obtained—adherence to a ceiling on bank credit may not imply that credit to the economy has been controlled. Thus, the perceived reliability of direct instruments may be misleading.
Finally, like other forms of economic control, direct monetary instruments hamper competition. Inefficient institutions may be protected from the pressure of unfettered competition. For instance, bank-by-bank credit controls protect inefficient banks from competition by limiting the growth of efficient banks. Moreover, if compliance is not uniform, financial intermediaries that comply with the controls may be placed at a disadvantage, further compromising the position of the formal financial sector.
Advantages of Indirect Instruments
Indirect instruments can provide more effective monetary control than direct controls. Indirect instruments provide the monetary authorities with greater flexibility in the implementation and conduct of monetary policy, whereas direct controls become increasingly ineffective over time, particularly as restrictions on international capital movements are reduced or circumvented.14
One reason that indirect instruments are more effective is that unlike direct controls they do not encourage disintermediation and the growth of an informal financial sector, which lowers the share of financial assets that the monetary authorities control. A second reason is that financial innovation (and liberalization) is largely driven by technological developments that reduce information and transaction costs. Since indirect instruments work through, rather than around, markets, they can be used to influence monetary conditions even when specific monetary aggregates become economically less important.15
Indirect instruments also permit much greater flexibility in policy implementation. Small, frequent changes in instrument settings are feasible, enabling the authorities to respond rapidly to shocks and to correct policy errors quickly, pre-empting the need for more major shifts in policy. Such timely responses are difficult with direct instruments, particularly credit ceilings, since they are often set on an annual or quarterly basis. Frequent changes in credit limits would also place an undue burden on banks, since banks typically lack the administrative means to adjust their credit portfolios abruptly.
In cases where the exchange rate is flexible, the central bank can choose an inflation objective, which can differ from the international rate of inflation, and set its instruments to achieve it.16 In this case, indirect instruments rely on the central bank’s position as the monopoly supplier of high-powered money, which enables the central bank to create liquidity shortages in the banking sector and to relieve them under conditions of its choosing. In turn, changes in the supply of high-powered money can, by affecting liquidity conditions, generate strong interest rate effects. In cases of a managed or fixed exchange rate, the country’s rate of inflation will mostly depend on international inflation. In this case, the central bank will need to set its instruments to obtain a balance of payments objective.17
Indirect instruments’ reliance on market forces helps to “depoliticize” the formulation of monetary policy and the allocation of credit.18 The use of indirect instruments encourages the development of financial markets, which are a rich source of economic signals. As part of the transition process, the authorities develop an awareness of changing market conditions and learn to “listen” as well as “guide.” To realize these benefits fully, indirect instruments must be accompanied by a capacity for timely and accurate analysis on the part of the central bank.
Finally, in contrast to the situation where direct instruments are the principal means of monetary control, the use of indirect instruments by the central bank can help to deepen financial markets, encouraging reintermediation.19 Unconstrained, competitive, deep financial markets tend to price capital according to its scarcity, in a transparent and efficient way. Credit tends to flow to those able to pay the highest rates (adjusted for risk), hence those able to use resources most productively. One of the main advantages of moving to indirect monetary instruments, together with financial liberalization, therefore, is an improvement in the efficiency of investment, as well as an increase in financial savings.20
Inherent Complexities in the Use of Indirect Instruments
Much of the appeal of direct methods lies in the close and apparently forthright link they seem to have with policy objectives. Such a simple correspondence does not hold in the case of indirect instruments, and policy may be more difficult to implement by indirect methods. Only bank reserves (the monetary base) or, at most, one short-term interest rate (the overnight rate or a money market rate, such as the three-month bill rate) may be controlled in the short run. Therefore, the central bank needs to define its objectives clearly and know how to set its instruments to achieve them. Because of lags in the transmission process, the effects of a particular setting cannot be observed immediately, giving rise to the need for intermediate targets or indicators that can be observed frequently (such as a monetary aggregate or a short-term interest rate).21
Some aspects of financial liberalization that accompany the introduction of indirect instruments may complicate the conduct of monetary policy. In many cases, for example, interest rate liberalization, or the ending of credit controls, destabilizes money or credit aggregates for a time, making their control virtually impossible.22 In addition, interest rates and exchange rates may become more interdependent. Finally, the opening of the capital account—also an increasing trend, although it does not always accompany the transition to indirect instruments—drastically curtails the authorities’ influence over the real rate of interest, even in the short run.
Criteria for Determining the Instrument Mix
In a discussion of what should determine the mix of instruments, general criteria can be distinguished from country-specific ones.23 Obviously, a key general criterion is the extent to which the instrument can control the variable that the monetary authority wishes to influence, such as the levels of money, credit, and interest rates. To exercise control, the effects of using the instrument must be predictable. The ability to control is also enhanced if the instrument is flexible, that is, if its monetary effects can be changed or reversed relatively quickly.
A second general criterion pertains to side effects on resource allocation. Would the use of the instrument interfere with financial markets and distort the allocation of real resources? For example, credit controls on each bank may be highly effective in controlling the aggregate amount of credit, but they can lead to financial disintermediation, slow down market development, and distort the allocation of resources.
A third general criterion concerns the extent to which the instrument contributes to the overall financial development of the country and the stability of its financial system. For instance, as the discussion below illustrates, central bank operations with securities are not only a means of controlling the amount of liquidity but can also encourage the development of financial markets, particularly those for short-term government debt instruments.
A fourth general criterion concerns whether the central bank can use the instrument to deal with financial shocks and stresses on a bank-specific basis, for instance by assisting individual banks to adjust to a temporary outflow of deposits. A discount window can be used to address individual problems of this type.
In general, central banks make use of several instruments of monetary policy, in light of the multiplicity of criteria outlined above. This requires them to coordinate how much each instrument will be used and how its use will affect the overall level of liquidity. Reserve money programming is an indispensable tool in achieving this coordination, since it can be used to analyze systematically the sources and uses of liquidity.
Table 3 illustrates the combinations of instruments and the way they are currently used in a number of countries.24 The table shows the considerable diversity in the way monetary policy is operated. This diversity reflects several structural and macroeconomic factors: historical circumstances; the general economic environment in which the instruments were developed; the characteristics of the interbank and money markets; the extent of price competition in the banking and securities markets; the reliability and efficiency of the clearing and settlement system for payments; the aggregate and bank-by-bank level of excess reserves; and the sources, magnitude, and expected duration of changes in bank reserves. Although broad operational parameters can be identified, and there is some recent convergence in techniques, particularly within Europe, considerable diversity in the operation of these instruments is likely to persist for some time.
|Reserve Requirements||Standing Facilities||Instruments||Markets||Operating Procedures||Other Instruments|
|Argentina||All banks; all deposits; 43 percent on demand and saving! deposits. 3 percent for 30-59 day deposits, and 0 percent for deposits of more than 60 days. Reserve deposits do rot have to be maintained exclusively in the currency of deposit but can be held up to 30 percent in another currency. On-time deposits. Unremunerated. Averaging. Currency in vault is not a reserve asset||Lender-of-last-resort rediscount facility: maximum 30-day term; roc exceeding net worth of borrower bank; not actively used.||Government bonds denominated in foreign currency.||Interbank market||Reversed transactions against government bonds. The central bank operates within an interest rate band: it sells bonds with repos at floor interest rate and buys at the ceiling: purpose is mitigating fluctuations in interest rates.|
|Chile||Requirements of 9 percent on peso demand deposits; 3.6 percent on peso time deposits; 30 percent on foreign currency deposits. Local currency reserve requirements are held in pesos, chose on foreign currencies are held in foreign currency. Remuneration of time deposits. Deposit base is taken as average of daily balances between ninth of each month and eighth of following month. Maintenance is on average basis.||Lender-of-last-resort rediscount facility available to banks all but one day of the month on daily basis, No bank car borrow in the intrafinancial market more than 10 percent of its assets.||Central bank's indexed instruments (PRCBs) of wide range of maturities (ranging from 30 days to 20 years). Treasury bills.||Mainly primary markets. Central Sank of Chile has recently started some nepos. They are intended to be short term. Banks and pension funds are main participants. Insurance companies have participated since 1993.||Two types of auctions. For papers of less than 90-day maturity, the auction is at the rate posted by the central bank. For the other maturities, the central bank sets the amount, and market participants put in bids for the rate.|
|France||All banks; all deposits up to one year maturity. Monthly averaging of reserves only (including vault cash). Unremunerated. 0.5 percent time deposits, 1 percent sight deposits. Not used for monetary policy.||Five- to ten-day repo facility at banks” initiative against private paper and T-bills: banks choose maturities. Rate above call interbank rate. Rate has strong announcement effect, changed parsimoniously.||T-bills and eligible private paper.||No monetary management through primary issuance. Government securities secondary market for outright transactions with all market participants. Reversed transactions against T-bills and private paper with banks. There exists an interbank repo market||Weekly volume tender of repos; seven days maturity: rate has strong announcement effect. Daily outright transactions with T-bills. Daily bilateral (with key counterparties) overnight reversed transactions for liquidity fine-tuning or interest race monitoring.|
|Ghana||Uniform cash reserve requirement on demand and time deposits. In addition, secondary liquidity requirement. No required reserves on foreign currency deposits.||Bank of Ghana discount window open to discount houses, which, in turn, discount securities held by banks.||Government securities and Bank of Ghana securities (bills and bonds).||Only primary market used for monetary operations.||Weekly auctions; multiple-price auction.|
|Indonesia||Since 1988, uniform race of 2 percent on all deposit liabilities: kept constant at 15 percent before 1988 due to uneven liquidity distribution among banks.||Two discount facilities created in 1984, one for temporary liquidity shortages, the other to provide assistance to banks with maturity mismatches; temporary special rediscount facility added in 1935 to provide liquidity to banks most affected by a currency and interbank market crisis; repayment of special facility within one year. From 1985 to 1987 special rediscount ceilings for standardized banker's acceptances (SBPUs).||Central bank certificates (SBIs) introduced in 1984: SPBUs added in 1985.||Primary-market auctions in SBIs; secondary market for SBIs and SBPUs used by central bank for daily auctions of repurchase agreement since 1987.||Weekly auctions of SBIs since 1984: in IW introduction of daily auctions of one-week repurchase agreements in SBIs and SBPUs; in late 1989, establishment of a syndicate of 15 banks to act as dealers and agents for the issuance of SBIs in the weekly auctions and as market makers in the secondary market.||Public sector deposits.|
|Japan||Introduced in 1957; un remunerated: rarely changed during last few years.||Discount facility accounts for three-fourths of refinancing to banking system; discount rate below money market rates; quarterly individual bank ceilings, but central bank determines every day the amount each bank can use and reserves right to call back advances at any time.||Commercial bills, commercial papers, government financing bills, treasury bills, government bonds, and certificates of deposit (CDs).||No monetary management through primary issuance. Purchases of short-term commercial bilis held by banks through money market dealers. Sales of commercial bills drawn on Sank of japan to money market dealers. Repurchase and reverse repurchase agreements in a variety of papers with financial institutions and security firms. Outright purchases of government bonds.||Modalities differ depending on type of security; repos and reverse repos generally made through auctions: transactions in commercial bills at bill rate determined in the interbank bill market: outright purchase of government bonds offered by Bank of Japan to limited number of financial institutions on a rotational basis at prevailing market race.||Moral suasion; until 1991 “window guidance” as special form of moral suasion to influence banks' lending decisions. Some remaining minor interest rate controls are being eliminated.|
|Mexico||None.||Emergency lending facility; rot often used.||T-bills (CETES) with maturities of IB. 91, and 151 days, 1 and 1 years; long-term government bonds (BONOS); Development Bonds (EON DES) with maturities of 1 and I years; bonds with their capital indexed to the consumer price index with maturities of three and five years (AJUSTABONOS); bonds indexed to the exchange rate with maturities of 91 and 182 days, and 1 year (TESOBONOS).||Primary markets of CETES and BONOS not used for liquidity management. Secondary market of CETES.||Outright transactions in CETES secondary market Reversed transactions in interbank market.||Central bank sometimes offers CDs tobanks.|
|New Zealand||None.||Automatic rediscount of central bank bills with less than 26 days to maturity; penal margin above comparable market rate: penal margin and overall stock of rediscounted bills set as policy parameters.||Separation between public debt management and monetary operations with government securities. Tenders of secured loans to banks as main policy instrument. In addition, buying and selling of (regular and seasonal) treasury bills, float tenders (daily special unsecured overnight credit), and issuance of central bank bills.||Daily float tenders, in which a large part of the government's daily cash receipts is lent back to the banking system for one day. Daily open market operations with treasury bills (and periodically Reserve Bank bills). Reserve Bank bill tenders held twice each week; Reserve Bank bills are central bank liabilities—the only financial instrument banks can discount with the central bank as of right.||Twice weekly primary issuance of central bank bills, by auction. Daily new issue of “seasonal” T-bills of as needed maturities, by auction. Daily repo-type operations against lessdian face value of underlying securities, by auction. Daily float tenders by auction.|
|Poland||All banks; zloty deposits only; up to 50 percent cash in vault; no averaging of base/reserve; unremunerated; 23 percent demand deposits, 10 percent time deposits; used infrequently.||Lombard against T-bills: access at 2—4 percent of capital; three-month term; not always above market rate. Rediscount: against bills of exchange; access limit as above less any Lombard credit; three-month term; below Lombard rate. Rediscount for seasonal credit to banks financing agriculture (phased out). Medium-term refinance of former central plan credits, above Lombard rate. Unsecured overdraft; discontinued October 1992.||T-bills (central bank bills discontinued January 1992), stricdy for treasury funding and not liquidity management.||No liquidity management through primary issuance. No secondary market. Reversed transactions with primary dealers agains it T-bilis.||Reversed transactions through uniform price auction; daily with same-day settlement 1-14 day maturity; against 100 percent face value. Large reverse repo transactions are used to sterilize central bank credit to government.|
|United Kingdom||0.35 percent of eligible liabilities to be deposited at central bank.||Overnight support given at discretionary interest rate Co offset overnight shortage: also lender-of-last-resort facility for banks in liquidity dificulties.||Purchases and sales, usually outright, but sometimes repo of eligible instruments, including government securities and private paper, most frequently with less than 15 days* maturity.||Monetary management through secondary markets.||Central bank usually deals twice a day; additional dealing at prespecified time later in day if necessary. Strong announcement effect of timing of dealing, maturities, and rates of dealing.|
|United States||Reserve requirements are currently assessed only on demand deposits and other checkable deposits, but the law allows imposition or other deposit categories: reserve ratios are rarely changed and are at present 3 percent for balances up to 351.9 million and ID percent far balances above that level.||Adjustment borrowing for short-term liquidity needs: access strictly controlled by Federal Reserve; discount rate below short-term market rates. Seasonal borrowing. Extended credit borrowing for depository institutions in difficulty: interest rates on the latter two are market related: modest volumes.||Outstanding treasury and federal agency securities (bills, bonds, and notes).||No monetary management through primary market Outright purchases and sales of securities in secondary market at market prices. Repurchase agreements in securities up to IS days.||When participating in the secondary market, the manager of the Fed's System Open Market Account has leeway as to the choice of security, maturity, timing, counterparty, and use of repurchase agreements.|