Implementation of Monetary Policy in a Regime with Zero Reserve Requirements

Abstract

Monetary policy can be implemented effectively without reserve requirements as long as cost incentives ensure a predictable demand for settlement balances. A central bank can then achieve the level of short-term interest rates that it desires, using market-oriented instruments only. In Canada, the framework provided by rules on interbank payments settlement and by the costs of deficits and surpluses on settlement accounts provides a strong incentive for the banks and other clearing institutions to target zero balances. Reforms of this framework, to follow the introduction of the Large-Value Transfer System, will ensure its continued effectiveness and make it more transparent. An appendix outlines the process by which reserve requirements were phased out in Canada. RésuméLa politique monétaire peut être mise en oeuvre avec efficacité dans un système libre de réserves obligatoires à la condition que des incitations financières rendent prévisible la demande d'encaisses de règlement. Si cette condition est respectée, la banque centrale est en mesure d'amener les taux d'intérêt à court terme au niveau souhaité au moyen uniquement d'instruments axés sur le marché. Au Canada, le cadre défini par les règles relatives au règlement des paiements interbancaires et par les coûts associés aux découverts ou aux excédents qu'enregistrent les comptes de règlement incite fortement les banques et les autres institutions participant à la compensation à viser un solde nul. Dès la mise en service du système de transfert de paiements de grande valeur, ce cadre sera redéfini afin de préserver son efficacité et de le rendre plus transparent. L'auteur expose en annexe les diverses étapes de l'élimination progressive des réserves obligatoires au Canada.

Monetary Policy in the Information Economy

“…The Bank of Canada had originally thought that a zero net supply of clearing balances was appropriate (see, e.g., Clinton, 1997), but by late in 1999 began instead to target a positive supply, initially $200 million Canadian (but at present only $50 million), as noted above. This, together with some care to adjust of the supply of settlement balances from day to day in response to variation in the volume of payments, has resulted in much more successful control of the overnight rate.…”

“…Under 30 For details of these systems, see, e.g., Archer et al, (1999), Bank of Canada (1999), Borio (1997), Brookes and Hampton (2000), Campbell (1998), Clinton (1997, Reserve Bank of Australia (1998), Reserve Bank of New Zealand (1999), and Sellon and Weiner (1997).…”

“…This was due to an underestimate of the supply of clearing balancesS needed 54 See Clinton (1997) and Bank of Canada (1999) for details of the system, and the connection between the change in the payment system and the introduction of standing facilities for implementing monetary policy.…”

Central Bank Operating Procedures: How the RBA Achieves Its Target for the Cash Rate

“…Under the standing facility the central bank stands ready to borrow and lend reserves to designated financial institutions at interest rates that are slightly below and slightly above the target rate. Discussions of this type of operating procedure are provided by the RBA (2003) and Jüttner and Hawtrey (1997) for Australia, Clinton (1997) and the Bank of Canada (1999) for Canada, and Archer, Brookes and Reddell (1999) for New Zealand. These papers are largely descriptive; however, Woodford (2000Woodford ( , 2001) presents a formal model of an interest rate channel.…”

Monetary Policy in a World Without Money

“…Bank of Canada (1999),Borio (1997),Brookes and Hampton (2000),Clinton (1997), ReserveBank of Australia (2000), Reserve Bank of New Zealand (1999) andSellon and Weiner (1997).15 For the sake of concreteness, I shall describe in particular the system used in New Zealand since March 1999, as I am writing this at the Reserve Bank of New Zealand.…”