Watch the introduction video to the course here: https://youtu.be/U7dQzqtIFVg The Asia-Pacific region contains some of world’s most dynamic economies. Economies around the globe rely on credible monetary policy implemented by central banking institutions. Monetary policy governs the liquidity available to the payment systems that underlie trade and finance. Smooth adjustment of liquidity can minimize instability in money and foreign exchange markets and keep inflation and growth on a secure footing. The industrial giants of China, Japan, and Korea; the Southeast Asian emerging markets of Indonesia, Malaysia, Philippines, and Thailand; and the international entrepots at Hong Kong and Singapore each face unique challenges in implementing liquidity policy. This advanced course will build a foundation for understanding liquidity policy implementation in the Asia-Pacific using standard economic models. The course will discuss the effects of high level discussion of a key element of national level public policy, monetary policy. Modern monetary policy connects macroeconomic conditions and key financial market indicators. It will also analyze the way that central bank goals for macroeconomic stability will determine outcomes in interest rates and exchange rates. The rigorous theoretical foundation should also build analytical skills that might be applied to policy and market analysis in a broad range of economies and even in the Asia-Pacific region as policy-making evolves in the future. The topics covered each week are: Module 1 - Monetary Policy Implementation Module 2 - Monetary Policy Strategy Module 3 - Exchange Rates and Monetary Policy After taking this course, you will be able to: (1) Describe Monetary Policy instruments central banks use (2) Interpret on-going actions of central banks (3) Apply graphical analysis and calculate basic economic measures used as tools by central banks or analysts (4) Analyze the way that central bank goals for macroeconomic stability will determine outcomes in interest rates and exchange rates
1.4 Open Market Operations
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來自 The Hong Kong University of Science and Technology 的課程
Monetary Policy in the Asia Pacific
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從本節課中
Monetary Policy Implementation
Welcome to the first module! This module will focus on the microeconomics of monetary policy implementation. We study how the central bank balances supply against demand in liquidity markets to target the key interest rate on interbank lending and influence money markets.
與講師見面
David CookProfessor
Department of Economics
In the previous section,
we concentrated on modeling the demand of
the commercial banking sector for central bank reserves.
We've seen the key concept that explains
the determination of the interbank interest rate as
a liquidity gap between the demand for reserves and the available supply of reserves.
The central bank as the issuer of reserves effectively sets the supply.
In this section, we'll try to answer two questions;
How do central banks set the supply of liquidity
and what is the impact from liquidity supply changes?
Bank reserves are held at the central bank.
The central bank changes the quantity of reserves by buying or selling
market assets from banks using reserve accounts as a vehicle.
The central bank engages in open market operations,
buying or selling government securities,
and crediting and debiting counter-party reserve accounts appropriately.
We'll learn to use T accounts to depict the change in
the banks balance sheets induced by a transaction.
Open market operations are implemented in two basic ways;
outright operations which change reserve liquidity,
and repo operations to stabilize reserves on a temporary basis.
After viewing this segment,
you should be able to; one,
use T accounts describe the impact of a transaction on the bank's balance sheet, two,
identify the types of open market operations,
and three, model the effects of changes in the supply of reserves.
Let's get started.
Consider this weekly data on reserve money issued by the Bank of Thailand.
We see the supply of reserves is growing over
time but also changes sharply from week to week.
This indicates that we cannot think about inter-bank interest rates
without thinking about changes in the supply of reserves.
The primary way that central banks change
the level of reserves is through open market operations.
Open market operations are the purchase or sale of financial assets by the central bank.
We will describe three types of operations;
outright operations, repo operations, and additional operations.
An open market purchase occurs when the central bank
buys financial assets from commercial banks.
The central bank credits the counter-party with
additional funds in the counterparty's reserve accounts.
This expands the monetary base and creates more liquidity.
An open market sale occurs when the central bank sells
their financial assets to commercial banks and
debits the counter-party banks reserve accounts.
Open market sales reduce the monetary base and drain liquidity.
Open market operations can be observed
through their impact on central bank balance sheets.
T accounts are visual aid for understanding the impact of
a transaction on the balance sheet of the entities engaging in the transaction.
Set up the T account by drawing a simple T.
Label the left hand side as assets and put liabilities on the right side.
Now we have a mini balance sheet which can
contain the balance sheet effects of any transaction.
Remember, balance sheets always balance,
so any transaction must have either equal impacts on assets or liabilities,
or zero net effect on either.
Consider how we might depict the impact of an open market operation on
the balance sheets of the central bank and any counter-party to the transaction.
First draw a T account representing the central bank balance sheet.
Then draw a T account for a commercial bank that
will act as a counter-party to the transaction.
Consider a hypothetical example;
A central bank open market purchase of
100 worth of debt securities from a commercial bank.
The central bank adds 100 insecurities to its portfolio.
The counter-party bank was
also credited assets by the same 100 worth of securities that they sell.
The central bank makes payment using its reserve account,
the central bank adds 100 to the reserve accounts of the counter-party bank,
this increases central bank liabilities.
The counter-party bank gets an extra amount of
reserves and loses an equal amount of securities,
so there is zero net effect on its total assets.
However, the composition of its assets has changed.
Now they have actual reserves which might be held or lent to other banks.
The central bank has increased its assets and liabilities
equally so its accounts remain in balances as well.
Notice that at the end of the transaction,
the overall supply of the monetary base of reserves has expanded.
The interbank rate is a market rate agreed upon
by borrowers and lenders in the private sector.
Like any market rate,
it is determined by the forces of supply and demand.
But the central bank determines the overall supply of liquidity
available for lending and thus can dominate market conditions.
If the central bank engages in an open market purchase of securities,
they will pump more money into the system and increase the supply of liquidity.
The excess liquidity surplus available in
the inter-bank market will push down interest rates until they get low enough for
banks to prefer to hold the available liquidity in
their own inventory rather than try to lend it out at the new lower interest rate.
This new interest rate will then become the new market equilibrium.
Likewise, when the central banks sell securities,
they reduce the amount of the monetary base that is available to commercial banks.
Consider an open market sale in which the central bank
sells 100 of debt securities to a counter-party bank.
The central bank finds a private bank that is looking to buy some securities.
If the central banks sell 100 worth of securities,
they can debit the reserve accounts of this counter-party.
The central bank loses some assets,
but also reduces liabilities.
In the end, this shrinks the monetary base of
reserves and all accounts remain in balance.
If the central bank sells assets and debits the counter-party's reserve accounts,
this will drain money from the system.
The supply of reserves will shrink.
This will create a liquidity shortage in the inter-bank market.
The short supply of liquidity in the inter-bank market will
push up interest rates for borrowers.
The decline in reserves creates a shortage of
liquidity that will push up the equilibrium interest rate.
Open market operations set off a chain of events.
An open market purchase will create
a liquidity surplus which will reduce inter-bank rates.
An open market sale will create a liquidity shortage and rising inter-bank rates.
Open market operations can be divided into two categories.
The first are outright operations when central banks permanently
purchase or sell assets most typically government securities,
central banks engage in outright operations intermittently in
order to change the level of reserves over an indefinite horizon.
Open market operations are typically conducted with
government or central bank issued securities.
However, in theory and practice,
open market operations can be conducted with purchases or sale of any tradable asset.
More than 100 years ago,
central bank operations were mostly conducted
with transactions in gold or silver bullion.
In the current period,
it is also common for central banks in the region to
engage in purchases or sales of foreign currency.
This can also change the level of bank reserves.
Also, some central banks engage in
unconventional measures like the purchase or sale of private sector securities.
The second category of open market operations are
repo operations which are short term lending and borrowing by the central bank.
Central banks conduct repo operations at regular intervals, usually weekly,
daily, or even more frequently in order to stabilize liquidity on an ongoing basis.
They are implemented using a type of open market instrument called repurchase agreements.
When central banks want to adjust their monetary base on a temporary basis,
they do so using repurchase agreements, nicknamed repos.
What is a repurchase agreement?
A repo is a financial contract that is the functional equivalent to short term lending.
The repo may or may not be implemented through a third party market maker,
but have the same basic form regardless.
The simple repo has three important dates.
At the immediate deal date,
all terms are specified including the price and size of
their purchase agreement along with the date of repurchase.
On the near date, cash is transferred to the account of
the seller while short term bonds are sold to the buyer.
On the far date, the bonds are repurchased by the seller at
the original purchase price plus a little extra interest.
This transaction is equivalent to the buyer taking a loan with interest.
The buyer acts as a lender providing cash up front and
the seller is a borrower repaying on the far date with interest.
The advantage of a repurchase agreement over a traditional loan,
is that the lender takes possession of the security upfront which mitigates
the risk since the security functions as a form of collateral.
Using repurchase agreements, the central bank
can add or drain liquidity quickly and smoothly.
Let's wrap up the topic of liquidity management with a discussion of
some additional types of open market operations which can stabilize liquidity.
Beyond outright operations and repo operations,
some other types of open market operations are conducted to manage liquidity.
One of these is the direct issuance of
debt securities by the central banks in the region.
Central banks in many Asian economies directly issue securities to investors.
This is done for several reasons,
including financing foreign reserves or developing the depth of bond markets.
Another reason is to absorb liquidity when there is
a structural excess of liquidity in the inter-bank market.
When the central bank issue securities,
they offer them to counter-party commercial banks who pay for the asset with reserves.
The issuance of central bank securities reduces the size of the liquid monetary base.
Though the overall amount of central bank liabilities are unchanged,
these liabilities are switched away from liquid liabilities which can be used
for inter-bank payments toward less liquid, longer term instruments.
Central banks may also guide liquidity by accepting
term deposits from commercial banks and
sometimes making loans over a period of a month or more.
When their central bank accepts deposits,
this reduces liquidity in the inter-bank market.
When the central bank makes loans,
this will increase liquidity.
The central bank engages in these longer term operations.
They believe there is some structural misalignment between
the supply of reserves and the demand reserves at the current policy rate.
By shifting reserves to term deposits,
they can reduce the liquidity available for lending in the inter-bank market.
Banks might accept term deposits in order to get a higher interest rate.
After completing this segment,
you should be able to; one,
use T accounts to describe the impact of a transaction on a bank's balance sheet.
Two, identify the types of open market operations and three,
model the effect of changes in the supply of reserves.
As we wrap up, let's conclude by summarizing the key questions.
How do central banks adjust liquidity and what is the impact?
The central bank can manage the liquidity available for
inter-bank transactions through open market operations.
An open market purchase increases liquidity and pushes down interest rates.
An open market sale drains liquidity and puts upward pressure on interest rates.
All of those are implemented through
outright operations or through temporary repurchase agreements.
