资本市场和金融机构4课件

Ch.7MonetaryPolicy:Tools,GoalsandTargets

(byMishkinetal.2004Ref.book)

GeneralOverviewRoleofBofC

“Topromoteeconomicandfinancialwell-beingofCanada” byachievingspecifiedgoals,mainly

lowandstableinflation.How? Mostlythrough

MonetaryPolicyviamanipulationofinterestratesandmoneysupply.

1Outline7.1BankofCanada:BalanceSheet7.2Monetarypolicy:BasicConcepts7.3TheMarketForSettlementBalancesAndTheOvernightRate7.4ToolsofMonetaryPolicy7.5GoalsofMonetaryPolicy7.6Targetsofmonetarypolicy7.7Conclusions27.1BankofCanada:BalanceSheet

TheBankofCanada(BofC):BalanceSheet*BankofCanadaAssetsLiabilitiesGovernmentSecuritiesAdvancestobanksNotesincirculationSettlementbalances(SB)*Onlyaccountsthatareaffectedbychangesinmonetarypolicyarereported

GeneralOverviewMonetaryLiabilities:MonetaryBase↑inNotesinCirculationandSettlementbalancesleadto↑inMoneySupplyAssets↑inGovernmentSecuritiesandAdvancestoBanksleadto↑inreserves(settlementbalancesofbanks)thatleadto↑inMoneySupplyInCanadathisoccursbychanging(↓)interestratesbytheBofCtomajorFIs,whichstimulatesdemandfordebt($viaopeningcheckingaccounts)whichleadstoincreasesinthemoneysupply–Ourmaintopic.Componentsofmonetarybase3

MonetaryAssets

a)GovernmentSecurities.QuantitycontrolledbyOpenMarketOperations

GovernmentofCanadasecuritiescontrolledbyOpenMarketOperations(TheBank’spurchaseandsaleofthesesecurities)

OpenMarketOperations

1.Outrightpurchaseandsellingofgovernmentsecuritiesbycentralbanks(Since1994,notlongeroperatedbytheBofC) 2.RepurchaseTransactions(mostcommon) a)SPRAs(repo):

Specialpurchaseandresaleagreementofgov’tsecuritiestoprimary

dealers

b)SRAs(reverserepo): Specialsaleandrepurchaseagreementofgovtsecuritiestoprimarydealers

b)Advances.

Collateralized

loans(usuallyovernight,one-day)tomembersofCanadianPaymentsAssociation(CPA).

↑inGovernmentSecuritiesbyBofCandAdvancestoBanksleadto↑inreserves(settlementbalancesofbanks)thatleadto↑inMoneySupply

5Non-bankPublic(Client)Assets

LiabilitiesSecurities-$100Chequabledeposits+$100Exampleofopenmarketoperation:Purchase$100ofgov’tsec

BankingSystem(e.g.,CIBC)Assets

LiabilitiesSettlementbalances+$100Chequabledeposits+$100(componentofmoneysupply)

CentralBank

Assets

LiabilitiesSecurities +$100SettlementBalances+$100(componentofmonetarybase)2)3)1)6TheBankofCanadaBalanceSheetAdvancestobanks(collateralizedloans)ResultinaninitialSB$100,MB$100↑moneysupply

7ImplementationofMonetaryPolicyinanutshellCanada'smajorfinancialinstitutionsroutinelyborrowandlendmoneyamongthemselvesovernight,inordertocovertheirtransactionsduringtheday.ThroughtheLargeValueTransferSystem(LVTS),theseinstitutionsconductlargetransactionswitheachotherelectronically.Attheendoftheday,thefinancialinstitutionsneedtosettlewitheachother.Onebankmayhavefundsleftoverattheendofthisprocess,whileanotherbankmayneedmoney(borrow).Thetradinginfundsthatallowsalltheinstitutionstocovertheirtransactionsiscalledtheovernightmarket.Theinterestratechargedonthoseloansiscalledtheovernightrate.TheBankcarriesoutmonetarypolicybyraisingandloweringtheovernightrate(target)9FrameworkfortheimplementationofMonet.PolicyImportantconcepts-LargeValueTransferSystem(LVTS)

Electronicclearingandsettlementsystemofreal-timefinancialwholesaletransactionsbyFIs(over$50,000).

OwnedandoperatedbytheCanadianPaymentsAssociationCPA CPA.ItsmembershipcomprisestheBankofCanadaandvirtuallyallofCanada'sbankandnon-bankdeposit-takingfinancialinstitutions.

{FindthetypesofFIsthatcomprisetheCPA}

AnLVTSparticipantisamemberoftheCPAwhichparticipatesintheLVTSandmaintainsasettlementaccountattheBankofCanada.

{FindthenamesofallparticipantsintheLVTS(intheinternet)}10

[Cont’dImportantconcepts]AutomatedClearingSettlementSystem(ACSS)TheACSSisadeferrednetsettlementsystemthroughwhichallpaymentsnotprocessedbytheLVTSarehandled,i.e.,retailsettlementbalances.

(e.g.,cheques,travellerscheques,moneyorders,pre-authorizeddebitsandfundtransfers,directdepositeditems,debitandcreditcharges,etc.).AlsooperatedbytheCPA.

AllLVTSparticipantsalsoparticipatedirectlyintheACCSandareknownasdirectclearers.

11

[Cont’dImportantconcepts]-OvernightMarket

Themarketatwhichmajorparticipants(LVTS)inthemoneymarketborrowandlendone-dayfundstoeachotherattheovernightrate

inordertocovertheirtransactionsduringtheday.

TheovernightrateoperateswithinanOperatingBandof50basispoints.

TheOperatingbandisthereferencerangeofinterestratesinwhichLVTSparticipantswilltradeamongthemselveswithnotincentivetotradeoutsideofthisrange.Why?

TheBofCimplementsmonetarypolicybychangingthetargetfortheovernightrate(midpointoftheoperatingband).

13[Cont’dImportantconcepts]OperatingBandfortheOvernightInterestRate

BankrateistheinterestratetheBofCchargestoLVTSparticipantsforloans

AttheendofthedayeachparticipantmustbringitssettlementbalancewiththeBofCclosetozero.

IfSBis(-)BofCstandingfacilitieslendatBankrate.IfSBis(+)borrowatBankrateminus50basispoints. (Forwholesaletransactions,orathebankrate

plus1.5%forretailACCStransactions.InbothcasesBofCrequirescollateral)FIsusuallyadjustpositionswitheachotheratapre-settlementtradingperiodbyclearingbalancesatmorefavourableratesamongthemselvesintheovernightinterbankmarket.Ingeneral,thiswillachieveazerosettlementbalanceforeachparticipantonwholesaletransactions.

BankRate,ib=2¾

Overnightrate,ior(%)S*=NetsupplyofSBotherthanthoseobtainedbystandingfacilities(minimumamounttoclearbyLVTSparticipants)ib-0.50=2¼

OperatingBandTargetOvernightRate,i*or=2½

147.3THEMARKETFORSETTLEMENTBALANCESANDTHEOVERNIGHTRATEThemarketforsettlementbalancesiswheretheovernightinterestrateisdetermined,andthisiswhyweturntoasupplyanddemandanalysisofthismarkettoanalyzehowthetoolsofmonetarypolicyaffecttheovernightrate.

SupplyCurveThesupplycurveforSBisdefinedbytheBofCtwostandingliquidityfacilitiesAt

ib

thesupplycurveofovernightSBfromtheBank’slendingfacilityisperfectlyelastic,indicatingthattheequilibriumovernightiratecannotexceedthebankrate,nomatterhowhighthedemandforsettlementbalancesmaybe.Atib-50basispoints,thesupplycurveisalsoperfectlyelastic,indicatingthattheEquilibriumicannotfallbelowthelowerlimitoftheoperatingband.TheverticalsegmentofthesupplycurveforsettlementbalancesindicatesthenetsupplyofSBotherthanthoseobtainedthroughtheBofC’sstandingliquidityfacilities.AssumingtheBofCistargetingalevelofSBofS*,thesupplyofsettlementbalancesisrepresentedbythesupplycurveshowninFig.2.15

BankRate,ib=2¾%Overnightrate,iorS*=NetsupplyofSBotherthanthoseobtainedbystandingfacilitiesib-0.50=2¼%OperatingBand

i*or

Fig.2EquilibriumintheOvernightMoneyMarketSupplyCurveThesupplycurveforSBisdefinedbytheBofCtwostandingliquidityfacilitiesAtibthesupplycurveofovernightSBformtheBank’slendingfacilityisperfectlyelasticAtib-50basispoints,thesupplycurveisalsoperfectlyelastic,TheverticalsegmentofthesupplycurveforsettlementbalancesindicatesthenetsupplyofSBThesupplyofsettlementbalancesisrepresentedbythesupplycurveshowninFig.2.DemandCurveThedemandforSBisdecreasingintheior,asshowninFig.2.Astheiorapproachesthelowerlimitdesiredclearingbalancesincreasesignificantly.(I.e.,FIstrytohave(+)SBinordertoavoidhaving(-)BSandpayingtherelativelyhigherbankrate)Equilibrium

occurswhentheSupply=DemandforsettlementbalancesequalizesatthetargetlevelofSB.ThisoccuratS*ati*or(whichcanbeanywherewithintheoperatingband).DS17BofCapproachtoMonetaryPolicy

KeepInflationwithinarangeof1%to3%,withatargetof2%.

Inflationmeasurebythe“CoreCPI”(excludesfood,energy,andtheeffectofindirecttaxes).Byusingarangeprovidesflexibilitytodealwithsupplyshocks(example:SARS,9/11,Poweroutages,etc).

Bychangingtheoperatingbandfortheovernightrate,theBofCsendsasignalregardingthedirectionthatitwouldlikeinterestratesandthemoneysupplytotake.(SeeFigures5and6onp.166Ref.Book)

18Changesintheovernightrateandtheyieldcurve

Adecrease(increase)inshort-terminterestratestypicallyhastwoeffectsonlong-termrates.Itdecreases(increases)thefive-yearweightedaverageslightly.Anditalsoaffectsexpectationsoffutureshort-terminterestrates.19Purchaseandresaleagreement(repo)

AtransactioninwhichtheBankofCanadaofferstopurchaseGovernmentofCanadasecuritiesfromprimarydealerswithanagreementtosellthemback(repurchasedbydealer)atapredeterminedprice(plusinterest,i.e.,reporateatthetargetovernightrate)thenextbusinessday.

Usedtoinfluencethemarketiatalowerdesiredlevel.ThisissimilartoacollateralizedloanobtainedbyanFIfromtheBankofCanada.NOTE:TheBankinitiatesSPRAsdaily(at11:45a.m.)ifovernightfundsaregenerallytradingabovethetargetrate(itusesrepos),whichwilldecreasetheinterestrate

21Saleandrepurchaseagreement(SRA)orReverserepo

-AtransactioninwhichtheBankofCanadaofferstosell GovernmentofCanadasecuritiestodesignated counterpartieswithanagreementtobuythembackat apredeterminedpricethenextbusinessday.

-Usedtoinfluencethemarketiatahigherdesiredlevel.

Forexample,iftheovernightrateistoolowrelativetothe

targetrate,theBofCusesreverse

repos,inwhichitsells

(lowprice,say$1000)governmentofCanadasecuritiesto

primarydealerswithinagreementtobuythemback(say

$1,000+interest)onthenextbusinessday.

-Primarydealersarethedesignatedcounterparties.

22MechanicsofBofCinterventionviaSPRAsandSRAs Step1.InitiallyBofCannounceschangesinthetargetforovernightrateat9AM

Step2.ToreinforcethetargetBofCmayinterveneintheovernigthmarketviaSPRA(repo)orSRAtransaction:11:45am Seenextslide23Step3.NeutralizationoperationbyBofC (tooffsetchangesinSBduetorepurchasetransactions)

How?

ByGovernmentDepositShifting:At4.15pm

Ifnoothertransactionoccursduringthedaythataffecttheaggregateclearingbalancesofdirectclearers,BofCmust,intheafternoon,neutralizetheeffectonaggregateclearingbalancesofitspurchaseofSPRAs. BofCshiftsgovernmentdepositsfromdirectclearersby$100toitsownaccount,bringingtheclearingbalancesamountbacktozeroinaggregate.

25

ib=3%iorS*=NetsupplyofSBotherthanthoseobtainedbystandingfacilitiesib-0.50=2½%i*or=2¾%S*i*or=2¾%ib-0.50=2¼%i*or=2½%SSD1D2iOpenMarketOperationsbyBankofCanadausingSPRAs EquilibriumintheovernightinterestrateSPRAsareusedtoinfluencethemarketinterestratetodecreaseatadesiredlevel

(bytargetingtheovernightinterestrateatthemidpointoftheoperatingband)

IncreaseindirectlytheMoneySupply(seenextslide-graph)Fig3SPRAD3Today(9:00am):BofCannouncesnewtargetrateYesterday26b)SRAs(reverserepo) Usedtoinfluencethemarketinterestratetoincreaseatadesiredlevelbytargetingtheovernightinterestrateatthemidpointoftheoperatingband

SRAsareusedifovernightfundsweretradingconsistentlyataratebelowthetargetof2.75%,saynearlowerlimitoftheoperatingband[2.5%-3%],i.e.,2.5%.BofCsellsgovtsecuritiesandtheLVTSparticipantsagreetosellthembacktotheBofConebusinessdaylater(I.e.,BofCborrows$givingasacollateralgovtsecandpayingbackamountborrowed$plusinterest).Exercise:

AssumetheBofC’soperatingbandfortheovernightinterestrateis2.5%-3% BofCannouncesnewtargetovernightinterestrateat3%.Answerthefollowingquestions.UseGraphwhenneeded A)Economicreason(s)whyBofCwantstochangetheovernightinterestrate a)Theeffectontheinterestrates b)Willprimarydealers(directclearers)bewillingtoparticipateatthisnewrate?Explain c)Whatistheneteffectonaggregateinclearingreserves(BS)ofdirectclearers d)Whatisthelikelyeffectontheyieldcurve?Explain29TheBankexpectstheeconomytobeexceedingitscapacityinthefutureandwishestoslowitdown.Itraisestheoperatingbandforiorinordertopreventinflationarypressuresfrombuilding.(REINFORCEDWITHSRAs)HowtheBofCKeepsinflationFromMovingAbovetheTargetRange[Fig6]303.BankofCanadaLendingLendingoflastresortAdvantagesPreventbankfailuressystemicriskDisadvantagesMoralHazardSept11,2001TheresponsetotheSept.11terroristattackstheG7’sgrouppromisedtheircentralbankswoulddeepliquidityflowingtofinancialmarkets.Similarly,theFedinjectedmorethanUS$100billion,intotheU.S.bankingsystemtokeepitfunctioningthroughloansandopenmarketoperationsatthefedfundsrate.4.GovernmentDepositShifting(CashManagement)

UsedtoneutralizeormanipulatereserveorBSholdingsofdirectclearersthroughdrawdownandredepositofgovernmentdepositsofdirectclearers; Forexample,ifBofCwishestodecreasetheclearingdeposits(SB)ofdirectclearers,itmovesgovernmentdepositsfromdirectclearersfromtheirownliabilitiestoincreasethegovernmentdepositsofBofC. Theresultisthatthedirectclearerdecreasesaliability(Governmentdeposit)anddecreasesanasset(SB).5.SwapswiththeExchangeFundAccount

UsedtobringtemporarychangesinsettlementbalancesontheaccountsofFIs.TheEFAcanalsobeusedbytheBofCtopreventundesirablechangesintheexchangerate.Forexample,giventhecurrentsituationofstrongCan$,astrategythatcanbefollowedbytheBofC(orCanadianfirmsand/orFI),istobuyUS$.DepreciationofCan$IncreasesinCanadianexportsincreaseineconomicgrowth.317.5GoalsofMonetaryPolicyHighEmploymentEconomicGrowthPriceStability.“In1923,aGermanhousewifeburnedmarknotesinherkitchenstove,sinceitwascheapertoburnmarksthantousethemtobuyfirewood”(Aguidetounderstandingmoney&investing,WSJ)In1923youneeded726millionmarkstobuythesamethan1markin1918.InterestRateStabilityStabilityofFinancialMarkets

(ChangesinUSmonetarypoliciesmayimpactadverselyotherfinancialmarkets,e.g.,RussianEuro-BondMarket1998)StabilityinForeignExchangeMarketsConflictofgoalsExamples:↓interestrate↑Economicgrowth↑inflationSolution?↑interestrate↓inflation↑interestrate↓Economicgrowth↑unemployment Usuallytheresultsofmonetarypolicyappearafter1yearortwo32Howthegoalscanbeachieved?ToolsOperatingTargetsIntermediateTargetsGoalsOpenMarketOperations -Outrightpurchaseandsellingofgovernment HighEmployment securitiesbytheBofC EconomicGrowth2.TargetOvernightInterestrate

PriceStability(e.g.,2%)

reinforcedby InterestRateStability

a)SPRAs(repo)

StabilityofFinMarkets

b)SRAs(reverserepo)

StabilityinFXMarkets3.LendingtoDirectClearers 4.GovernmentDep