Open Market Operations & Effectiveness

of Monetary Policy

To be presented to Bank of Thailand’s Symposium on

Monetary Policy in a New Environment3-4 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

RW

HH

GOV

CorpBOT

Imports/Remittances

Exports

Tax

Saving

Interest/Wage/Salary

GDP

G

I

C

Dep Loan

Bond

Securitization

Liberalization

Fin Inst

Monetary Transmission MechanismFrederic 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

90 96Australia 1.0 1.0Canada -- --France 0.5 - 5.5 0.5 - 1.0Germany 4.15 - 12.1 1.5 - 2.0Japan 0.125 - 2.5 0.05 - 1.3UK 0.45 0.35US 3.0 - 12.0 3.0 - 10.0

; NZ

Lower RR & r Insensitivity

Working

Balances

Money market rate

Reserves

D

D

∆r

End of maintenance period effects on r

Interest Rate Corridor

Working

Balances

Money market rate

Reserves

D

D

∆rDiscount

or Remunerated Dep

Reverse Repo, MSP

Lombard, O/D, Rediscout, Bank Rate

Fed Funds Rate, Tender, SONIA,

Call & Cash Rates

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 SheetVaez-Zadeh (1991)

• FA (net)

• CG (net)

• Claims on Bk (gross)

• Curr in Circ

• Reserve Dep

• Other Item (net)

–Capital Acc.

Mb

Decomposition of Variance of Mb

M = NFA + NDCG + DCP + OTH

σσσσ2M = σσσσ2

F + σσσσ2G + σσσσ2

B + 2σσσσFG + 2σσσσGB + 2σσσσFB + [ 2σσσσFO + 2σσσσGO +2σσσσBO + σσσσ2

O ]

σσσσ2*M =σσσσ2

M - 2σσσσFG - 2σσσσGB - 2σσσσFB > σσσσ2M

OMO = - 2σσσσgp - 2σσσσfp - 2σσσσfgσσσσ2

m - 2σσσσgp - 2σσσσfp - 2σσσσfg

Accom.= σσσσ2m / σσσσ2*

m

IT Countries’ Accommodation

0.0

50.0

100.0

150.0

200.0

250.0

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

Thai Aus Can NZ UK

IT Countries’ AccommodationThai Aus Can NZ UKT A C N

0.0

20.0

40.0

60.0

80.0

100.0

120.0

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

T T

T T

T

T

T

T

T

A

A

A

A

A

A

A

A

A

A

A

C

C

C

C

C

C

C

C

C

C CN

NN

N N

K

K

K

K

Non-IT AccommodationThai Fr Gr Jap US

UF JT G

0.0

20.0

40.0

60.0

80.0

100.0

120.0

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

U

U

U

UU

U

U

UU

F

F

F

F

F

F

T

T

T

T

TT

T

TT

T

T

T

J

J

J

J J J

J

JJ J

J

G

G

G

G

G G

G

G

G

G

F

F

F

IT Mb Volatility36 per. Mov. Avg. (NZ) 36 per. Mov. Avg. (Thai) 36 per. Mov. Avg. (UK)36 per. Mov. Avg. (Can) 36 per. Mov. Avg. (Aus)

N TC A

0.0

5.0

10.0

15.0

20.0

25.0

30.0

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

N

N

N

N

N

N

TT

T T

T

T

C C C C C

CC C

A AA A

A

AK

K

Non-IT Mb Volatility36 per. Mov. Avg. (Fr) 36 per. Mov. Avg. (Jap)F

UG

0

3

6

9

57 68 79 90

36 per. Mov. Avg. (Gr) 36 per. Mov. Avg. (US)

F F

F

F

F

F

F

F

F

F

U

U

U

UU

G G

G

G

G

G

J

J

JJ

J

J

J

J

JThai Mb Volatility vs Others

0.0

2.0

4.0

6.0

8.0

57 68 79 90

36 per.Mov . Avg. (Thai) 36 per.Mov . Avg. (Oth 8)

Monthly Mb movements

-100000

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

13/2/1997

13/5/1997

13/8/1997

13/11/1997

13/2/1998

13/5/1998

13/8/1998

13/11/1998

13/2/1999

13/5/1999

13/8/1999

13/11/1999

13/2/2000

13/5/2000

13/8/2000

13/11/2000

13/2/2001

13/5/2001

/\MB(-22)0 1M-moving/\M(-22)million BAHT

IT r Volatility36 per. Mov. Avg. (Thai) 36 per. Mov. Avg. (NZ) 36 per. Mov. Avg. (Aus)

36 per. Mov. Avg. (Can) 36 per. Mov. Avg. (UK)

T N A

0.0

1.0

2.0

3.0

4.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

T

T

T T

T

T

TT

T

N

N

N

N

N

N

N N

NA

A

A

A

A

A

AA A

C

Non-IT r Volatility

0

0.5

1

1.5

2

2.5

3

57 68 79 90

36 per.Mov . Avg. (US) 36 per.Mov . Avg. (Fr ) 36 per.Mov . Avg. (Jap) 36 per.Mov . Avg. (Gr )U

U

U

U

U

U

U

UU

U

F

F

F

F

F

FF

J

J

J

J

J

J

J

J

JJ

J

J

G

GG

G

G

G

G

G

G

GG

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 RP14d Target

0

5

10

15

20

25

30

97

0

0.5

1

1.5

2

2.5

3

3.5

4

1-Day 14-Day 1-Day 14-Day

999800

Clear vs. Unclear Signals

1

1.5

2

2.5

3

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A

BC

IT Correlation r & rl36 per. Mov. Avg. (Aus) 36 per. Mov. Avg. (Thai) 36 per. Mov. Avg. (UK)36 per. Mov. Avg. (NZ) 36 per. Mov. Avg. (Can)

A T

N

K

C

-1.2

-0.7

-0.2

0.3

0.8

1.3

57 68 79 90

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

A

AA

A A

A

A

T

T T

T

T

T

T

N

N NN

K

K

K

K

K KCC C C

C

Non- IT Correlation r & rl36 per. Mov. Avg. (Jap) 36 per. Mov. Avg. (Fr)

36 per. Mov. Avg. (Gr) 36 per. Mov. Avg. (US)

J F

UG

-1.2

-0.7

-0.2

0.3

0.8

1.3

57 68 79 90

J

J

J J J

J

J

J

J

F FF

F

F F

UU

U

U

UG G

G

G

GG

G

IT Correlation r & rd36 per. Mov. Avg. (Thai) 36 per. Mov. Avg. (Aus) 36 per. Mov. Avg. (UK)T A K

C N

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

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

36 per. Mov. Avg. (Can) 36 per. Mov. Avg. (NZ)

T

T

TT

T

T

A

A

A

A

A

A

K

K

KK

KC

C CC

CC

N

N NN

Non- IT Correlation r & rd36 per. Mov. Avg. (Jap) 36 per. Mov. Avg. (US) 36 per. Mov. Avg. (Gr)

J U G

-1.5

-1

-0.5

0

0.5

1

1.5

57 68 79 90

J

JJ

JJ

J

J

JU

UU U

U U

UG

G

G

GG

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:RP14d

• 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 bB– 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

-1000000

-800000

-600000

-400000

-200000

0

200000

400000

600000

800000

1000000

1200000

1/9/

1997

1/12

/199

7

1/3/

1998

1/6/

1998

1/9/

1998

1/12

/199

8

1/3/

1999

1/6/

1999

1/9/

1999

1/12

/199

9

1/3/

2000

1/6/

2000

1/9/

2000

1/12

/200

0

1/3/

2001

OTHERS CFI NFIDF_CR NFA NCG

SOURCES OF MONETARY BASE & THEIR MOVEMENTS

Daily Changes in ERB:Yen B:USD Euro /\B/Y /\B/$ /\Euro

0

10

20

30

40

50

60

97

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

98 99 00 01

The Mechanics of Money Multiplier

BBL

TFB

Oth FIs

100 Baht

90 Baht

81 B

72.9 B

Multiplier ~ 10 @

Reserve /M

b Ratios (IT

)

0 10 20 30 40 50 60 70 80

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

AU

SC

AN

NZ

UK

Reserve/M

b Ratios (N

on-IT)

FR

GR

JP

0 10 20 30 40 50 60

1957195819591960196119621963196419651966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999

US

Reserve/M

b Ratio (T

hailand)T

HA

ILAN

D:R

eserves/Moetary

base

0 5 10 15 20 25 30 35 40 45 50

196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

5358

6368

7378

8388

9398

Thai

Avg22

WghtA

vg22

JapS

ing

Com

parison of Monetary B

ase Grow

th Rates (M

A5Y

rs)