Following a trend initiated in the 1970s in industrial countries, most central banks in emerging market economies and developing countries have attempted to implement monetary policy through money market operations. How have they fared? The experience has been mixed, according to a recently published IMF staff paper, Monetary Policy Implementation at Different Stages of Market Development. Whereas some countries have successfully moved toward using market-based instruments for monetary policy operations, others have not managed to build the strong market infrastructure needed to fully rely on these tools for liquidity management. Still other countries have found that the lack of competition has complicated the use of money market operation.
Since 1999, the IMF has provided technical assistance to more than 100 countries to help them make the transition to market-based frameworks. The world’s central bankers generally agree that using open market operations in conducting monetary policy complements broader reforms aimed at reducing direct government intervention in the economy, improving the capacity of financial institutions to mobilize domestic savings, and strengthening the role of market forces in the allocation of financial resources.
Drawing on the experience gained from technical assistance, and on a detailed review of a dozen countries and regions, the paper identified common factors behind the difficulties in moving to market-based monetary policy operations. The failure to establish a clear separation between money creation and government funding needs, as well as limited market participation and the lack of an effective framework to decide on the timing and size of central bank operations, often limited the effectiveness of money market operations.
A supplement to the paper also looked in some detail at the experiences of the Eastern Caribbean Currency Union, the Democratic Republic of the Congo, Egypt, Kyrgyz Republic, Malta, The Gambia, Tonga, Tunisia, Uganda, Ukraine, Vanuatu, and Zambia.
More central banks in developing and emerging market countries are moving away from using credit and interest rate controls.
|(percent of sampled countries)|
|Credit and interest rate|
|Liquid asset ratio||65||30||9|
The paper concluded that although the development of money market operations needs to be tailored to each country’s particular circumstances, in general, reforms take hold most effectively in the context of a stable macroeconomic environment and sound fiscal policies, a stable and competitive financial system and adequate supervisory framework, and a significant degree of institutional autonomy and operational capacity at the central bank.
In discussing the paper, the IMF Executive Board supported the staff’s recommendation to develop a menu of options for implementing monetary policy that takes into account underlying obstacles to market development, including the extent of dollarization, the size of the country, government financing needs, structural excess liquidity, implementation capacity at the central bank, and the strength of the banking system.
For more information, please refer to Public Information Notice No. 05/15 and the staff paper Monetary Policy Implementation at Different Stages of Market Development prepared by an IMF team led by Bernard J. Laurens at the IMF’s website (www.imf.org).
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