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Monetary Policy-Making Around the World: Different Approaches from
Different Central Banks
February 25, 2004A Professor’s Guide to Economic Data and Monetary
Policy Making
Patricia PollardResearch Officer and Economist
Federal Reserve Bank of St. Louis
The views expressed do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis nor the Federal Reserve System
18 2024
3640
55
75
109
136
149
171 173 172 173 173 173 173
162
0
50
100
150
200
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002
Number of Central Banks
Central Banks by Staff Size: 2002
5 Largest
5 Smallest
Country
Number of Workers
Country
Number of Workers
China
150,000
Nauru
26
Russia 82,000
Brunei
28
Euro System 56,538
Comoros
37
India
29,922
San Marino
43 United States
23,438
Djibouti
51
Mean
3,304
Median
614
Source: Robert Pringle, editor, The Morgan Stanley Dean Witter Central Bank Directory, (London: Central Banking Publications), 2003.
InstrumentsOperating
TargetsIntermediate
Targets
- Reserve Requirements- Official interest Rates- Open Market Operations- Direct Controls
- Short-term Interest Rate- Reserve Aggregates
- Monetary Aggregates - Inflation - Exchange Rate
Goals
- Price stability - Sustainable Growth - High Employment - Financial Stability
Tactics Strategy
Monetary Policy Framework
Monetary Policy Framework
• Institutional Arrangement
• Goals/Objectives
• Targets
• Instruments
• Policy making Process
Institutional Arrangement
• Who Determines the Framework?– Government
– Central Bank
– Interaction• Goal versus instrument independence
Goals of Monetary Policy
• What Can Monetary Policy Achieve?
– Price Stability
– Employment
– Economic Growth
Statutory Objectives of Central Banks
(Bank of England Survey of 94 Central Banks)
Only non-monetary stability (1%)
Monetary stability & other non-conflicting
(57%)
No statutory goals(3%)
Monetary stability& conflicting (13%)
Only monetary stability (26%)
Source: Mahadeva and Sterne (2000)
Targets of Monetary Policy
• What Do Central Banks Target?– Inflation Rate – Exchange Rate– Monetary Aggregates
• Who Sets the Target?– Central Bank– Government– Both
Explicit Targets and Who Sets Them: 1998
Survey of 93 Central Banks
28
9
17
10
22
23
1
14
15
4
5
0% 20% 40% 60% 80% 100%
No explict target (5)
Monetary target (39)
Exchange rate target(49)
Inflation target (55)
Central Bank Both Government Not Defined No explicit target
Source: Mahadeva and Sterne (2000)
Targets of Monetary Policy
• Who Sets the Target?– U.S. – No targets set – Euro Area – ECB defines price stability
• Below but close to 2 percent in medium term
– England – Government• 2 percent
– Canada – Government and Bank of Canada• 1 to 3 percent
– Japan – Bank of Japan• Outstanding balance of current accounts at BOJ
– 30 to 35 trillion yen
Targets of Monetary Policy
• Changes in Targets in 1990s– Increase in use of targets
• In 1990 57 percent had an explicit target• In 1998 95 percent had an explicit target
– Increased popularity of inflation target• 1990
– 5 countries set an inflation target
– 1 country relied solely on an inflation target
• 1998– 54 countries set an inflation target
– 11 countries relied solely on an inflation target
Explicit Targets: 1990 and 1998
32
4
17
3
4
10
14
1
0% 20% 40% 60% 80% 100%
No explict target(36)
Monetary target(14)
Exchange ratetarget (31)
Inflation target(4)
Developing
Advanced
Source: Mahadeva and Sterne (2000)
18
22
25
14
13
16
8
15
13
0% 20% 40% 60% 80% 100%
Monetary target(40)
Exchange ratetarget (50)
Inflation target(54)
Developing
Transitional
Advanced
1990(84 central banks)
1998(93 central banks)
Explicit Targets: 1998 and 2004
4
18
22
25
14
13
16
1
8
15
13
0% 20% 40% 60% 80% 100%
No explict target(5)
Monetary target(40)
Exchange ratetarget (50)
Inflation target(54)
Developing
Transitional
Advanced
19
23
27
14
13
16
1
5
5
9
0% 20% 40% 60% 80% 100%
No explict target(1)
Monetary target(38)
Exchange ratetarget (41)
Inflation target(52)
Developing
Transitional
Advanced
1998
2004
Instruments of Monetary Policy
• Direct Controls– Set or limit prices (interest rates)– Set or limit quantities (amount of credit
outstanding)
• Indirect Controls– Adjust the underlying demand and supply of bank
reserves
Instruments of Monetary Policy
• Reserve Requirements– Not used as a policy instrument in most countries– Bank of Canada does not set reserve requirements– Bank of England sets a cash ratio deposit, not for
policy purposes.– Federal Reserve, ECB and BOJ all set reserve
requirements
Instruments of Monetary Policy
• Open Market Operations– Federal Reserve
• Uses open market operations to meet the target for fed funds rate
• Once a day• Repurchases – overnight to 3 months
– European Central Bank• Minimum refinancing rate sets lower bound for repurchases• Once a week• Repurchases – 14 days
– Bank of England• Repo rate is the rate at which BOE provides liquidity to the
interbank market, sets the Sterling Overnight Interbank Average Rate (SONIA)
• Several times a day• Repurchases – 14 days
Instruments of Monetary Policy
• Open Market Operations– Bank of Japan
• Uses open market operations to meet target for the outstanding balance of current accounts held at the Bank of Japan
• Two to three times a day• Repurchases and outright purchases• Repos range from 7 days to 6 months
– Bank of Canada• Uses open market operations to keep the target for
overnight rate within a 50 basis point band• Once a day if rate is straying from the target • Repurchases – overnight
Instruments of Monetary Policy
• Standing Facilities– Facilities that allow financial institutions to borrow
directly from the central bank• Provide upper bound for official interest rate target
– May allow for lending to the central bank• Provide lower bound for official interest rate target
– Activated on demand by market participants– Typically overnight loans only
Instruments of Monetary Policy
• Standing Facilities: Central Bank Lending– Federal Reserve
• Primary Discount Rate– Penalty rate, set at 100 basis points above fed funds rate target
– European Central Bank• Marginal Lending Rate
– Penalty rate, since April 1999 has been set at 100 basis points above the main refinancing minimum bid rate
– Bank of England• No typical lending rate
• Late overnight repo facility, penalty rate set at 100 basis points above the repo rate
Instruments of Monetary Policy
• Standing Facilities: Central Bank Lending– Bank of Japan
• Basic Loan Rate (Discount Rate)– Penalty rate, with additional penalties for frequent borrowers
– Bank of Canada• Bank Rate
– Penalty rate, set at 25 basis points above the target for the overnight rate
Instruments of Monetary Policy
• Standing Facilities: Central Bank Deposits– Federal Reserve
• No interest on deposits at the Federal Reserve
– European Central Bank• Deposit Rate
– Since April 1999 has been set at 100 basis points below the main refinancing minimum bid rate
– Bank of England• No interest on deposits at the Bank of England
– Bank of Japan• No interest on deposits
– Bank of Canada• Deposit rate set at 25 basis point below the target for the
overnight rate
ECB Key Interest Rates January 1, 1999 – February 23, 2004
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
Jan-0
2
Apr-0
2
Jul-0
2
Oct-0
2
Jan-0
3
Apr-0
3
Jul-0
3
Oct-0
3
Jan-0
4
Apr-0
4
Percent
Deposit Rate
Marginal Lending Rate
Refinancing Rate
Bank of Canada Key Interest Rates January 1, 1999 – February 23, 2004
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
Jan-0
2
Apr-0
2
Jul-0
2
Oct-0
2
Jan-0
3
Apr-0
3
Jul-0
3
Oct-0
3
Jan-0
4
Apr-0
4
Percent
Deposit Rate
Bank Rate
Overnight Rate Target
Federal Reserve Key Interest Rates January 1, 1999 – February 20, 2004
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
Jan-0
2
Apr-0
2
Jul-0
2
Oct-0
2
Jan-0
3
Apr-0
3
Jul-0
3
Oct-0
3
Jan-0
4
Apr-0
4
Percent
Discount Rate
Fed funds target
ECB Key Interest Rates January 1, 1999 – February 23, 2004
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
Jan-0
2
Apr-0
2
Jul-0
2
Oct-0
2
Jan-0
3
Apr-0
3
Jul-0
3
Oct-0
3
Jan-0
4
Apr-0
4
Percent
Deposit Rate
Marginal Lending Rate
Refinancing Rate
EONIA
Bank of Canada Key Interest Rates January 1, 1999 – February 23, 2004
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
Jan-0
2
Apr-0
2
Jul-0
2
Oct-0
2
Jan-0
3
Apr-0
3
Jul-0
3
Oct-0
3
Jan-0
4
Apr-0
4
Percent
Deposit Rate
Bank Rate
Overnight Rate Target
Overnight Repo rate
Federal Reserve Key Interest Rates January 1, 1999 – February 20, 2004
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
Jan-0
2
Apr-0
2
Jul-0
2
Oct-0
2
Jan-0
3
Apr-0
3
Jul-0
3
Oct-0
3
Jan-0
4
Apr-0
4
Percent
Discount Rate
Fed funds target
Fed fundsrate
Monetary Policy Process
• Who Makes the Policy Decisions?– Individual (9)
– Committee (79)• Consensus (43)
• Formal Vote (36)– Individual votes published (6)
» Japan, Korea, Poland, Sweden, United Kingdom, United States
Monetary Policy Process
• Who Makes the Policy Decisions?– Number of People on Policy Board/Committee
• Most common is between 5 and 10 members• FOMC -- 12 members (19 participants) • ECB -- 18 members• Bank of England -- 9 members• BOJ -- 9 members• Bank of Canada -- 6 members
Less than 5 5 to 10 More than 100
10
20
30
40
50
60
19
55
8
Members of Policy Board
Monetary Policy Process
• How Frequent Are the Policy Meetings?– 40 percent meet monthly
– 34 percent meet weekly
– FOMC – 8 times a year
– ECB -- Monthly
– Bank of England -- Monthly
– BOJ – 15 times a year?
– Bank of Canada – 8 times a year
Frequency of Policy Board Meetings
Frequency # of CBs
Less than quarterly 1
Quarterly 4
More than quarterly 2
Monthly 36
Fortnightly 8
Weekly 30
Twice per week 4
Daily 4
Source: Mahadeva and Sterne(2000)
Monetary Policy Process
• How Frequent Is the Main Instrument Changed?– Much variation in the frequency with which the main policy instrument
is changed.
– Average changes per year 1999-2003• FOMC – 3.8• ECB – 3.0• Bank of England -- 3.6• Bank of Canada – 4.6
0-1 2 3-4 12 or less > 120
5
10
15
20
25Number of changes per year
15
23 18
3
18
Number of Changes in Main Policy Instrument1999-2003
Year FOMC ECB BOC BOE
1999 3 2 3 6
2000 3 6 3 2
2001 11 4 9 7
2002 1 1 4 0
2003 1 2 4 3
Total 19 15 23 18
Monetary Policy Process
Changes in the Main Policy Instrument
0
1
2
3
4
5
6
7
Jan-9
9
Apr-
99
Jul-9
9
Oct
-99
Jan-0
0
Apr-
00
Jul-0
0
Oct
-00
Jan-0
1
Apr-
01
Jul-0
1
Oct
-01
Jan-0
2
Apr-
02
Jul-0
2
Oct
-02
Jan-0
3
Apr-
03
Jul-0
3
Oct
-03
FOMC – Federal Funds Rate Target
Source: Federal Reserve Board
Changes in the Main Policy Instrument
0
1
2
3
4
5
6
7
Jan-9
9
Apr-
99
Jul-9
9
Oct
-99
Jan-0
0
Apr-
00
Jul-0
0
Oct
-00
Jan-0
1
Apr-
01
Jul-0
1
Oct
-01
Jan-0
2
Apr-
02
Jul-0
2
Oct
-02
Jan-0
3
Apr-
03
Jul-0
3
Oct
-03
Bank of England – Repo Rate
Source: Bank of England
Changes in the Main Policy Instrument
0
1
2
3
4
5
6
7
Jan-9
9
Apr-
99
Jul-9
9
Oct
-99
Jan-0
0
Apr-
00
Jul-0
0
Oct
-00
Jan-0
1
Apr-
01
Jul-0
1
Oct
-01
Jan-0
2
Apr-
02
Jul-0
2
Oct
-02
Jan-0
3
Apr-
03
Jul-0
3
Oct
-03
Bank of Canada – Bank Rate
Source: Bank of Canada
Changes in the Main Policy Instrument
0
1
2
3
4
5
6
7
Jan-9
9
Apr-
99
Jul-9
9
Oct
-99
Jan-0
0
Apr-
00
Jul-0
0
Oct
-00
Jan-0
1
Apr-
01
Jul-0
1
Oct
-01
Jan-0
2
Apr-
02
Jul-0
2
Oct
-02
Jan-0
3
Apr-
03
Jul-0
3
Oct
-03
European Central Bank – Main Refinancing Rate
Source: Eurostat
Monetary Policy Process
• Transparency– Are changes in policy announced?
– Is the vote published?
– Are minutes of the policy meeting released?
Monetary Policy Process
Indicators of Transparency
FOMC ECB BOC BOE
Announcement Immediately Immediately Immediately Immediately
Vote Published Immediately No* No With minutes
Minutes Released
Thursday after next scheduled meeting
No NoTwo weeks
after meeting
•No vote is taken.
Want to Learn More?
• Central Bank Websites– Bank of Canada
• www.bankofcanada.ca/en
– Bank of England• www.bankofengland.co.uk
– Bank of Japan• www.boj.or.jp/en
– European Central Bank• www.ecb.int
– Federal Reserve System (Board of Governors)• www.federalreserve.gov
– Links to the website of most central banks can be found on the website of the Bank for International Settlements
• www.bis.org/cbanks.htm
Want to Learn More?
• Books and Articles– Alexander, William E., Tomas J.T. Balino, and Charles Enoch, “The
Adoption of Indirect Instruments of Monetary Policy, IMF Occasional Paper No. 126.
– Bank for International Settlements, “Comparing Monetary Policy Operating Procedures Across the United States, Japan and the Euro Area,” BIS Papers No. 9, December 2001.
– Mahadeva, Lavan and Gabriel Sterne, editors. Monetary Policy Frameworks in a Global Context. Routledge Publishers: New York, 2000. (http://www.bankofengland.co.uk/ccbs/publication/pdf/mpfagcabstract.htm
– Paulin, Graydon, “The Changing Face of Central Banking in the 1990s,” Bank of Canada Review, Summer 2001.
Want to Learn More?
• Books and Articles– Pollard, Patricia S. “A Look Inside Two Central Banks: The
European Central Bank and the Federal Reserve.” Federal Reserve Bank of St. Louis Review. January/February 2003. (research.stlouisfed.org/publications/review/03/01/Pollard.pdf)
– “Central Banking in Other Industrialized Countries, Federal Reserve Bank of Boston, New England Economic Review, Second Quarter 2002. (http://www.bos.frb.org/economic/neer/neer2002/index.htm#2)