Open Market Operations Effectiveness of Monetary Policy To
- Slides: 40
Open Market Operations & Effectiveness of Monetary Policy To be presented to Bank of Thailand’s Symposium on Monetary Policy in a New Environment 3 -4 July 2001
Outline • How do ST interest rates pass through? • Prepare for return of volatility • Learn from past experiences of 8 DCs – Structural Issues – Tactics • Micro-Macro Linkages of MP – Effectiveness of MP? = • Policy Implications
Imports/Remittances Exports RW Tax Liberalization Fin Inst Bond Dep HH GOV Loan BOT Securitization Saving Interest/Wage/Salary G GDP Corp I C
Monetary Transmission Mechanism • • Frederic S. Mishkin: J Ec Persp, Fall 95 Interest rate channel – M => i => I => Y Exchange rate channel – M => i => E => NX => Y Asset price channels – M => Pe =>q=(Mk Pr/Repl Costs) => I => Y – M => Pe => Wealth => C => Y Credit channels – M => Bnk Dep => Bnk Loans => I => Y – M => Pe => Adv Sel&Moral Haz => L =>I => Y – M => i => Cash Flow => ASMH => L => I => Y – M => Pe => Fin Distress => C => Y
Trend in Reserve Requirements Australia Canada; NZ France Germany Japan UK US 90 1. 0 -0. 5 - 5. 5 4. 15 - 12. 1 0. 125 - 2. 5 0. 45 3. 0 - 12. 0 96 1. 0 -0. 5 - 1. 0 1. 5 - 2. 0 0. 05 - 1. 3 0. 35 3. 0 - 10. 0
Lower RR & r Insensitivity Money market rate D Dr D Working Balances Reserves
End of maintenance period effects on r
Interest Rate Corridor Money market rate D Discount Dr or Remunerated Dep Reverse Repo, MSP Lombard, O/D, Rediscout, Bank Rate Fed Funds Rate, Tender, SONIA, Call & Cash Rates D Working Balances Reserves
General Principles • • Active Liquidity Management Increased Uses of Signaling Prevalence of Interest rate Corridor Clarify signals; Prevent abuses; Discretionary – ST rate varies from ‘target’ < 0. 15% – Much Narrower than Corridor (0. 5 - 2%(
Central Bank Balance Sheet Vaez-Zadeh (1991( • FA (net( • CG (net( • Claims on Bk (gross( • Curr in Circ Mb • Reserve Dep • Other Item (net( – Capital Acc.
Decomposition of Variance of Mb M = NFA + NDCG + DCP + OTH s 2 M = s 2 F + s 2 G + s 2 B + 2 s. FG + 2 s. GB + 2 s. FB + ] 2 s. FO + 2 s. GO +2 s. BO + s 2 O [ s 2*M = s 2 M - 2 s. FG - 2 s. GB - 2 s. FB > s 2 M OMO = - 2 sgp - 2 sfg s 2 m - 2 sgp - 2 sfg Accom. = s 2 m / s 2*m
IT Countries’ Accommodation Thai Aus Can NZ UK 250. 0 200. 0 150. 0 100. 0 50. 0 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
IT Countries’ Accommodation T Thai A Aus C Can N K UK NZ 120. 0 T 100. 0 80. 0 T C A 60. 0 C A C N A C A A 40. 0 20. 0 A T CT T T N A C A K C N A N T A T C K 0. 0 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Non-IT Accommodation T F Thai G Fr J Gr U Jap US 120. 0 T 100. 0 80. 0 60. 0 U U F J T T UJ J F T 40. 0 20. 0 J F G T J J G F U F G T G J T F UG G T G G J U U G J T T G J T J F T F F 0. 0 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
30. 0 N C IT Mb Volatility 36 per. Mov. Avg. (NZ( 36 per. Mov. Avg. (Can( T A 36 per. Mov. Avg. (Thai( 36 per. Mov. Avg. (Aus( K 36 per. Mov. Avg. (UK( 25. 0 N 20. 0 15. 0 N N 10. 0 N 5. 0 C 0. 0 N C T AC A T C T A C N K T C A A T C 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Non-IT Mb Volatility F G 9 36 per. Mov. Avg. (Fr) 36 per. Mov. Avg. (Gr) J U 36 per. Mov. Avg. (Jap) 36 per. Mov. Avg. (US) J J F J J 6 F F G 3 U F J G G G F J F F U 79 F J G U 0 68 J F G U 57 F 90 U
Thai Mb Volatility vs Others 36 per. Mov. Avg. (Thai( 36 per. Mov. Avg. (Oth 8( 8. 0 6. 0 4. 0 2. 0 0. 0 57 68 79 90
Monthly Mb movements million BAHT /MB(-22)0 (1 M-moving/M(-22 100000 80000 60000 40000 20000400006000080000100000/2 13 97 998 98 999 99 000 00 001 98 97 97 99 00 9 9 9 9 0 /1 /1 /1 /2 /2 /2 /8 /2 /5 /5 /5 /8 /2 /5 11 11 / / 3 3 3 3 1 1 1 13 13 7 / 9 19
T C IT r Volatility 36 per. Mov. Avg. (Thai( 36 per. Mov. Avg. (Can( N 36 per. Mov. Avg. (NZ( 36 per. Mov. Avg. (UK( A 36 per. Mov. Avg. (Aus( 4. 0 T N 3. 0 N N 2. 0 T A A T A 1. 0 T A T T T N A N N N A A N A 0. 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
Non-IT r Volatility U 36 per. Mov. Avg. (US( F 36 per. Mov. Avg. (Fr( J G 36 per. Mov. Avg. (Gr( 36 per. Mov. Avg. (Jap( 3 2. 5 U F 2 G J 1. 5 J U 1 G U 0. 5 U J G G U J J F J JU G G F U J F G J G 0 57 68 79 90 J U FG F J G U
General Trends • Interest Rate Volatility Declined • Monetary Base Volatility Increased – Thai 2. 5% below Others • Monetary Accommodation rose • Why Worry So Much about r -volatility?
Daily Changes in r from RP 14 d Target 1 -Day 14 -Day 30 4 3. 5 25 3 20 2. 5 15 2 1. 5 10 1 5 0 97 98 99 00 0
Clear vs. Unclear Signals 3 C B 2. 5 2 A 1. 5 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
IT Correlation r & rl A N 36 per. Mov. Avg. (Aus( 36 per. Mov. Avg. (NZ( T C 36 per. Mov. Avg. (Thai( 36 per. Mov. Avg. (Can( K 36 per. Mov. Avg. (UK( 1. 3 1. 2 0. 8 C 0. 3 T K T 0. 2 - K C A T A K N T N C C K N T T A 1. 0 K 0. 8 N A K 0. 7 - A A C 0. 6 T A 0. 4 0. 2 0. 0 0. 20. 4 - 1. 2 - 0. 6 - 57 68 79 90
Non- IT Correlation r & rl J F U 36 per. Mov. Avg. (Jap( G 36 per. Mov. Avg. (Gr( 36 per. Mov. Avg. (Fr( 36 per. Mov. Avg. (US( 1. 3 U 0. 8 U J J J 0. 3 U F G J F G U G J F J 0. 2 - 0. 7 - 1. 2 - 57 68 79 90 F G J U G F J G
1. 5 1. 0 T C IT Correlation r & rd 36 per. Mov. Avg. (Thai( 36 per. Mov. Avg. (Can( A N 36 per. Mov. Avg. (Aus( 36 per. Mov. Avg. (UK( 36 per. Mov. Avg. (NZ( A 0. 5 C C A 0. 0 0. 5 - K T K A C T K T T C N A C C K N A N K T T K 1. 01. 557 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Non- IT Correlation r & rd J U 36 per. Mov. Avg. (Jap( G 36 per. Mov. Avg. (US( 36 per. Mov. Avg. (Gr( 1. 5 1 U J J 0. 5 U J G U 0 U G J G U U G J J 0. 511. 5 - 57 68 79 90 J G U J
The Tail that can wag the Dog: A Qualification (Hardy 1997( • Optimal interest rates =? Unknown • Limit intervention=>More info Acquisition – Info => market prices => r Policy – Micro-management => Loss of Information • Opt Intervention : – r stability vs. info efficiency – Some room for fluctuation • Money Market Input => MPB
So, has Thai MP been effective? • Correlations improving after crisis – ER Flexibility => independent MP – Since 2000 => announce clear target: RP 14 d • May be early to conclude
Policy Implications • Market participants prepared for Mb volatility within limits • More active liquidity management – r stability vs. discretion vs. moral hazard • Place more emphasis on signaling – Standing Facility ~ safety valve & – Confirm signals • Possible magnitude 2. 5% of Mb ~ 12. 5 b. B – Both injections & withdrawals: ST only
Benefits / Costs Analysis • What does society gain? – More efficient money market => Sustain Grwth • What do commercial banks gain? – More convenient ST liq adjustments • What does the BOT gain? – Stronger transmission mechanisms – More effective MP
Other Structural Issues • Bond Market Development – Private Repo • Prepare for RTGS & 24 Hrs Transactions • Rapid speed of trans & Info assymmetry<= – Pre-Settlement Interbank Rounds – Tendency towards O/N rates • Specific structure ~ country specific
Sources of Mb Changes SOURCES OF MONETARY BASE & THEIR MOVEMENTS 1200000 1000000 800000 600000 400000 200000 0 -200000 -400000 -600000 9/ 19 97 1/ 12 /1 99 7 1/ 3/ 19 98 1/ 6/ 19 98 1/ 9/ 19 98 1/ 12 /1 99 8 1/ 3/ 19 99 1/ 6/ 19 99 1/ 9/ 19 99 1/ 12 /1 99 9 1/ 3/ 20 00 1/ 6/ 20 00 1/ 9/ 20 00 1/ 12 /2 00 0 1/ 3/ 20 01 -800000 1/ -1000000 OTHERS CFI NFIDF_CR NFA NCG
Daily Changes in ER B: Yen B: USD Euro /B/Y /B/$ /Euro 60 5 4. 5 50 4 3. 5 40 3 30 2. 5 2 20 1. 5 1 10 0. 5 0 0 97 98 99 00 01
The Mechanics of Money Multiplier 100 Baht 72. 9 B BBL Multiplier ~ 10@ Oth FIs 90 Baht 81 B TFB
0 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Reserve / Mb Ratios (IT) AUS CAN NZ UK 80 70 60 50 40 30 20 10
19 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 99 Reserve/Mb Ratios (Non-IT) FR GR JP US 60 50 40 30 20 10 0
196 0 196 1 196 2 196 3 196 4 196 5 196 6 196 7 196 8 196 9 197 0 197 1 197 2 197 3 197 4 197 5 197 6 197 7 197 8 197 9 198 0 198 1 198 2 198 3 198 4 198 5 198 6 198 7 198 8 198 9 199 0 199 1 199 2 199 3 199 4 199 5 199 6 199 7 199 8 Reserve/Mb Ratio (Thailand) THAILAND: Reserves/Moetary base 50 45 40 35 30 25 20 15 10 5 0
Comparison of Monetary Base Growth Rates (MA 5 Yrs) 25. 00 20. 00 15. 00 10. 00 5. 0053 58 Thai 63 68 Avg 22 73 78 Wght. Avg 22 83 88 Jap 93 Sing 98