UNIVERSITY OF CALIFORNIA, SAN DIEGO
Monetary Policy, the Banking System, and Short-term Money Instruments
A dissertation submitted in partial satisfaction of the requirements for the degree Doctor of Philosophy in
Economics
by
lichiro Uesugi
Committee in charge:
Professor James D Hamilton, Chair Professor Wouter den Haan
Professor Marjorie Flavin Professor Takeo Hoshi Professor Miles Kahler
2000
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8 ăt, mẽ Ặ nể vi ID Ầ e viii Acknowledgmentts ccccccccsecccecssscccecccecessesscerensnesseesseebspessvessneses ix
Vita, and Fields of Study .ccccecscsecscsccecescncescsscecscesceceseeseesessnenes xi ve
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An Institutional Comparison of Money Markets and Market Operations Between the US and Ïapan HQ nọ HH mm nh ni nh my nh nen l
| yee (1 6 (0) | mm mm vn nh nh im 2
2 Features about short-term money markets and reserve systems + 3 2.1 Money markets overall cccscoccccecscscscsceccrscvcscscnessenseeesees 3 2.2 The Federal Funds market (US) and the call market (Japan) 5 - 2.3 Reserve SystOms .s.secrccscscsvcnscscecesescccecesescrerscessensscnenes 7 3 Practices of the daily implementation of monetary policies:
the Fed and the BOJ - - Q1 nh mm 10 3.1 Variation of market operation instruments
and the discount window lending .- - se 10 3.2 Frequency of market operations _ l§ 3.3 A day in market operation desks - óc - nen se 17 4 Objectives of the daily implementation of monetary
policies - -_ -QQ nọ KỲ kh tin hp 20 4.1 Relation between the market operations and other variables 20 4.2 Operating targets ccsscccsccssscevevcecresersceseeesseeronsesssenees 24 5 Implications on the liquidity effect .-< 26 › ƯA" 33 Measuring the Liquidity Effect: A Comparison Between the US and Japan 34 L Introduction :.csecseccscscssccecesesececceseecnssecsscnsensenssesssenenes 35 2 Institutional Background -.ccscesccecsecsvescccssccscnesersnsesssoess 40 3 Estimation Methodology -.csescssecsccsccscceecssssrsesenereceeeees 44 (1) Using instrumental variables {e2 44 (2) Are these good instruments? Ăn 45 (i) Correlation between the instruments and the reserves 45 (ii) Exogeneity with respect to reserVes 46 4 Estimation ResulÌts -Q BH nh kh nh nh nh tư 48 (1) The model of NBR (US) and TR (Japan) - - 49 () A basic model - -QQ QQ Q1 n1 ni 49 (ii) A model with responses of NBR(TR) to previous day’s error in
Trang 7(i) Arbasic model nh e 54 (ii) A model with anticipated changes in the exogenous variables .55 (3) Quality of forecasts by the BOJ c.ccscscesevcsevereceseerseeeneees 57 5 Comparison ofthe liquidity effect Q Quy 60
°* e 63
References - cm HT ni mi nen mm ve 77 On the Relationship between the Very Short Forward and Spot Interest Rates 79 HA nhe ẻ e 80
II i nh ắắeeee 83
3 Data description -Q HQ nh nh nh nh nh nh ch §7 4 Estimation ofthe predictability - - - Ăn 89 (1) Estimation of basic equations_ - -Q nen 89 (2) Estimation of asymmetric predictive power equations 06 90 (3) Estimation to investigate another asymmetry: the effect of
Monetary POlicy ccseccrcsserscccrerecnevcesesensenseeseneneeness 93 $ Conclusion ee 96
Trang 8Chapter I
Table 2.1: Descriptions and size of instruments in the short-term money markets 4 Table 2.2: Reserve Systems csccsccesceececcccsceccccnceeccescscneceesesscesscecessences 9 Table 3.1: Maturity and characteristics of each instrument - ll Table 3.2: Frequency of implementation of each market operation instrument 15 Table 3.3: Time schedule of market operations_ .-. nen 19 Table 4.1: Balance sheet of the central banks .ccssessececceccrecesceseeceeceeee 20 Chapter IT
Table 2.1: The balance sheet for the BOJ, 30" of April, 999 5.522 2< << 65
Table 2.2: Contents of BOJ’s daily report ccecccsccssscrsceecceseceeesecereeeceeee 65 Table 2.3: Relation between the BOJ balance sheet items and the three categories
Affecting FESEFVES ccsceccnsecceecccercescecencceeccecceescenescerscescescesees 66 Table 2.4: Elements included in the treasury and others factor in Japan 66 Table 3.1: Correlation between the prediction errors and reserV€S 66 Table 4.1: Modeling differences ccesecossceccecececcescescescescesceescreesereeseees 67 Table 4.2: Estimates of the basic modeÌ_ - nen ca 68 Table 4.3: Estimates for the prediction error in the previous đay 69 Table 4.4: Estimates for the three kinds of variables - - 70 Table 4.5: Estimates of the basic modeÌ - - con nn ng ng ng 71 Table 4.6: Estimates for three clustered date dummies with the prediction errors 72 Table 4.7: Estimates for the anticipated changes in the exogenous variables 72 Table 4.8: Estimates for the unanticipated and the anticipated changes
in the exogenous variables ccecccesescceccceccessscscssccceseeecerersens 73 Table 4.9: Estimates for the lagged prediction errors .2.ccsscceseeecesececececeeeceees 73 Table 4.10:Estimates for the possible explanatory variables 74 Table 4.11:Comparison of the estimates between the model with the original forecast
and that with the improved - SH kh ve 75 Table 5.1: Semi-elasticity of the interest rate to reserVes 76 Table 5.2: Change of the interest rate to one negative standard deviation shock 76 Chapter III
Trang 9Chapter I
Figure 3.1: | Borrowed reserves change — ssssccesececeeceeeseceerscceccsecssceeens 30
Figure 3.2 (a): Banknote factor cccccscesscesessccescnccccscvccsscccvsccsccecescssnscessee 30 Figure 3.2 (b): Treasury factor cccceececccecevsvsccesccecsecscsscecsccsececevcecescessens 31
l2 S2 ố.ốố ẻe 31
Figure 3.3: Total reserves change -QQ TQ nh nh nu ng nen cưy 32 Figure 5.1: Demand and supply schedules in the reserve market 29 Chapter II
Figure 1.1: | Demand and supply schedules in the reserve market 36 Chapter III
Trang 10I am deeply grateful to my advisor, Professor James D Hamilton for his patient guidance, warm encouragement, and enduring support through all stages of the research His keen intuition in monetary economics and vast knowledge in econometrics played a key role in making good research progress Without his presence, this goal could not have been achieved
I am grateful to Professors Wouter Den Haan, Marjorie Flavin, and Takeo Hoshi for their valuable comments and suggestions I also would like to thank Professors Clive Granger, Walter Heller, Bruce Lehmann, Allan Timmerman, and Valerie Ramey for interesting discussions and suggestions
I would like to express my sincere thanks to the late Professor Tsuneo Ishikawa of University of Tokyo, who passed away two years ago at the age of 51 He not only wrote a recommendation letter for me to study here but also showed me how we should study economics during my undergraduate days Without his instruction and encouragement, I would not pursue the doctoral degree in economics
Trang 11years Among them, especially, I wish to thank Yoichi Arai, Max Auffhammer, Jeff and Hiromi Bethard, James Brennan, Andrew Caffrey, Jin Seo Cho, Michael Davis, Shigeru Fujita, Rafaella Giacomini, Tomoo Inoue, Isao Ishida, Yongil Jeon, Garett Jones, Takayuki Kamae, Dong Heon Kim, Frank Kim, Natalya Lebedeva, Zhigang Li, Simone Manganelli, Andrew Patton, Bradley Paye, Binney Putnam, Piers Redmore, Lorien Rice, Sivan Ritz, Kevin Sheppard, Makoto Shimoji, Ricardo Suganuma, Yueting Tong, Michael and Lisa Wilson, Guy Yamashiro, and Zhiwei Zhang
I am also grateful to Guy Yamashiro, Lynn Fisher, and Professor Margaret Loken for proofreading and editing this dissertation
Finally, I would like to thank my parents, Koichiro and Keiko Uesugi and my fiancée-to-be, Noriko Matsunami for their warm and continuous support Without
them, I could not have survived here
Trang 12October 4, 1969 1993
1993-1997 1999 2000
Born, Takasago, Hyogo, Japan B.A., University of Tokyo, Japan
Ministry of International Trade and Industry, Japan M.A., University of California, San Diego
Ph.D., University of California, San Diego
FIELDS OF STUDY Major Field: Economics
Studies in Monetary Economics
Professors James D Hamilton, Wouter Den Haan, Marjorie Flavin, and Takeo Hoshi
Studies in Econometrics
Trang 13Monetary Policy, the Banking System, and Short-term Money Instruments
by lichiro Uesugi
Doctor of Philosophy in Economics University of California, San Diego, 2000
Professor James D Hamilton, Chair
Chapter I examines two countries, the US and Japan and make some comparisons in the following four topics: (1) money markets and reserve systems, (2) practices of market operations and discount window lending by the central banks, (3) objectives of market operations, and (4) implications of institutional differences and similarities on the liquidity effect
Based on the above institutional investigation, Chapter II measures the liquidity effect in Japan, and compares it with the US Since the institutional features are similar across these
countries, we apply Hamilton’s (1997,1998) methodology to obtain the estimates In addition,
Trang 14in these countries that the liquidity effect is larger and more statistically significant toward the end of the period
Trang 16To understand the effects of monetary policy in a country, we have to know institutional differences in financial markets, practices of monetary policy, and so forth between countries Without this knowledge we may misinterpret results from econometric models or may misspecify the models themselves
Trang 172.1 Money markets overall
Short-term money markets in this paper are defined as those in which assets have a maturity of less than one year and are traded by market participants The call, bills (Tegata), securities with repurchase agreements (securities with Gensaki), certificate of deposits (CDs), commercial paper (CP), treasury bills (TBs) and financial bills (FBs) fall into this category in Japan, while the Federal Funds (FF), Repurchase Agreements (RPs), CDs, CP, bankers acceptances (BAs), and TBs do in the US Descriptions and the market size of each instrument are shown in Table 2.1
Trang 18US
Instrument Typical maturities Principal borrowers Size in 1996 FF and | FF 1 day Depository institutions 700.3 RPs | TRPs | I day, 2daysto3 | Banks, security dealers, other
months owners of securities,
6 month or more is nonfinancial corporations,
less typical overnments
cD 1 to 6 months or Depository institutions 590.9
longer
cP 1 to 270 days Financial and business 715.4
enterprises
BA 90 days Financial and business 25.8
enterprises
TB 3 to 12 months Government 777.4
Total 2869.7
GDP ratio 37.6%
JAPAN
Instrument Typical maturities Principal borrowers Size in 1996 Call | Collateraliz | 1 day Depository institutions 343.6
ed Nothing for more than a week Uncollatera | 1 day
lized Almost nothing is for
more than 4 months
| Tegata 1 week to 3 months Depository institutions 95.3
CD 2 weeks and longer Depository institutions 276.0
CP up to 9 months Financial and business 93.5
enterprises
TB 3 or 6 months Government 111.2
FB 2 months Government 7.8
Securities with 5 days to 3 months Banks, securities dealers, 103.0
Gensaki** nonfinancial corporations,
governments, government- related institutions
Total 1030.3
GDP ratio 23.9%
* Offshore market and Eurodollar(yen) market are excluded here because they are not primary concern of central banks which implement market operations only in the above domestic money markets **Excluding TB and FB transactions with Gensaki Repo market was formally established in April 1996 following the abolition of old regulations for the Repo transactions It is functionally the same as the market for securities with Gensaki in that cash and securities are exchanged for a limited period of
Trang 19operation instruments the BOJ has today As we will mention in section 3, the BOJ uses Tegata and CP for market operations in addition to TB while the Fed does not use them as operation instruments This is due to the fact that there is not a core market for the BOJ to make market operations in Japan If there are government short-term bond markets which satisfy the following conditions, (a) appropriate market size, (b) homogeneity of operational instruments, (c) same-day settlement, and (d) minimal administrative cost, there will be a core market like that in the US However, TB market in Japan lacks condition (a)' Some people criticize that the withholding tax system for the profit from redemption of TB is the obstacle for foreigners to purchase Japanese TBs
2.2 The Federal Funds market (US) and the call market (Japan)
Next, we look at the difference between the Federal Funds market and the call market The interest rates in these markets have the most importance both to the central banks and market participants
' Other instruments have other problems as well (i) Tegata and CP
Tegata and CP are issued by various private companies Therefore, their creditworthiness is not homogeneous, and additional administrative work is necessary, making them not appropriate as primary tools of operation
(ii) Long-term securities with Gensaki
Trang 20institutions deal directly with each other and the other is that brokers bring together financial institutions with shortages and those with excess reserves On the contrary in Japan, only transactions with brokers are allowed as transactions in the call market Direct transactions between depository institutions in the FF market most commonly consist of sales by small-to-medium sized institutions to larger correspondent banks A substantial share of large transactions is arranged in the brokers' market Trades
through the brokers are typically for $25 million or more, although smaller trades may be executed on occasion In 1996, the daily volume of the FF trades arranged through brokers reporting to the Fed of NY averaged around $45 billion (No measure is available of the total volume of the FF transaction, including direct transactions.)
In the FF market, loans are unsecured, while in the call market in Japan there are two types of loans, which are collateralized (secured) and uncollateralized
Trang 21Japan at that time To maintain solvency, the Bank of Taiwan borrowed a large amount in the uncollateralized call market However, when the BOJ refused to
continue advances without a government guarantee, it failed and stopped the payback of its call loans for more than three months Following this incident, dealers in the call market established the rules to prohibit the uncollateralized call loan
In both of these markets, ‘term’ transactions whose maturity ranges from a few days to (more than) one year do exist However, the term funds market in the Federal Funds market is considerably smaller than the overnight market; the volume of activity varies, but the amount of term FF outstanding is probably on the order of one tenth of the amount of overnight funds arranged on a given day For the call market in Japan, overnight transactions dominate the entire call market, having a share of 67.3% of total outstanding (sum of the collateralized and the uncollateralized) at the end of October, 1997
2.3 Reserve systems
Trang 22Reserve demand is inelastic to the interest rate in this case On the other hand, banks that are able to have carry-overs may change the demand for reserves on the final day When they think that the interest rate on the final day is too high, they may leave a portion of reserve requirement to be satisfied in the next maintenance period The reserve demand in this case is more elastic to the interest rate than the case without carry-overs Second, the length of a lag between the period for calculating the reserve requirement and the period for maintaining the required reserves are different between the two countries In the US, the lag is only for two days while it is half a month in Japan Third, applied vault cash is included in the reserve requirement in the US while it is not in Japan
Aside from the above obvious differences, we briefly note two other points of interest The first is that the excess reserve ratio in the US is much higher than in Japan (1.225% in the US and 0.142% in Japan from 1967-87, 2.542% in the US and 0.412% in Japan from November 1996 to October in 1997) This might come from the carry-over system in the US, which is not allowed in Japan’
The second is that Japanese depository institutions do not seem to recognize the reserve system as partly contemporaneous though it has a half-month overlapping period The preliminary values of total deposits (and the required reserves) at the
Trang 23
in the midst of the period (1* of the next month) do not differ significantly Table 2.2 Reserve systems
US JAPAN
Maintenance (M) and C is 2 days prior to M (for the C is half'a month prior to M computation (C) period | transactional deposit) *
lag C is 14 days behind of M (for the
vault cash) **
Length of one 2 weeks 1 month
maintenance period (from Thursday to Wednesday two | (from 16" of month to 15" of the
(for the transactional weeks later) *** next month)
deposit)
Treatment of vault cash [| Applied vault cash is included in _| It is not included in required required reserves reserves
Carry-over Possible (Up to 4% of required Not allowed reserves)
Reserve-ratio 3-10% (for transaction accounts) 0.05-1.2% (for time deposits) 0.1-1.3% (for others) Penalty rate for the short | Discount rate + 2% Discount rate + 3.75%
of reserves
* From 7/30/1998, C is 16 days prior to M This means that there's no overlapping days between C and M now There is a complete lagged reserve system for the transactional deposits
Trang 243 Practices of the daily implementation of monetary policies: the Fed and the BOJ
The fundamental features in the daily monetary policy implementations are the same in these two countries in that their central banks have used both of discount window lending and market operations to affect the money markets based on their reserve systems However, once we go into details, they are significantly different in what market operation instruments are available, how they see the discount window lending, and so forth These differences come partly from the different money market structures and the different reserve systems we discussed in the second section Based on this understanding, we make comparisons between the Fed and the BOJ in the way they use monetary policy tools in practice
Trang 25Table 3.1 Maturity and characteristics of each instrument JAPAN
Maturity Active instruments Non-active instruments Overnight Discount lending,
Tegata operation (sales) TB purchase
Less than 3 months Discount lending _———= Tegata operation (purchase
and sales) TB purchase CP purchase FB sales * Repo operation **
Long-term bonds purchase with Gensaki *
More than 3 months Long-term bonds purchase ———_—_= outright
US
Maturity Active instruments Non-active instruments
Overnight to 15 days RPs, MSPs Discount lending _
15 days and more Outright purchase of bonds Discount lending * They are not used now (10/99)
** Repo operation: The BOJ borrows bonds from private banks and gives money as collateral to them (from 11/28/97) This has replaced the long-term bonds purchase with Gensaki since the repo is not subject to the securities transaction tax while Gensaki operations are
The next notable difference seems to be about the treatment of discount window lending It is classified as a non-active instrument in the US, in that the Fed passively supplies reserves when private banks come to the discount window On the contrary, the BOJ have attempted to directly control the discount window lending
"(For BOJ lending,) BOJ advances to banks are made and called back solely upon the BOJ's initiative; amounts also determined by the BOJ This makes BOJ lending a very flexible and attractive instrument for controlling the reserve supply in the money market." (Okina 1993, p43)
Trang 26discount windows looks similar, although there are still several superficial differences between them’
In the US, the Fed waits for private banks to come to the discount window asking for borrowed reserves If private banks have good reasons to come to the discount window, such as an unexpected increase in the loan demand, a sudden drop in deposits, or a temporary and unexpected difficulty to acquire funds, the Fed has to supply certain amount of borrowed reserves to them But the Fed is not completely passive in giving funds to the private banks It sets credit lines for each bank asking for the loans It does more intense surveillance to the banks with more borrowed reserves, which affects the frequency banks come to the discount window and the amount of borrowed reserves they ask for at the window
In Japan, the BOJ seems to take initiatives by making offers of the discount window loans to private banks But the BOJ has to collect information about which private bank is in need of additional funds to initiate the discount window loans Once it comes to know that there is a serious shortage of funds in some banks, it is pretty difficult for the BOJ to completely disregard the situation without making an offer of loans
From the above descriptions, we state that in both of the countries the decision about making discount window loans are firmly based on the needs for reserves of each private bank, which forces the central banks to respond They have to make
3 ‘There is some feature that makes the discount window loans in Japan look more active than those in
Trang 27certain amount of discount window loans to accommodate the reserve demands of each bank whether the central bank makes the first move or not
As stated above, the difference between whether discount window loans are considered active or not is not ascribed to the difference in the fundamental
characteristics between countries The two countries are the same in that their central banks have to passively respond to the demand for reserves of each bank with the discount window loans to some extent Rather, difference in the treatment of these discount loans seems to come from other reasons, such as, how each central bank has to rely on the loans
In the US, the Fed has relied heavily upon and has long used the RPs operation that buys government bonds or bills (TBs or FBs) with a resale agreement as an overnight adjustment tool However, until recently in Japan, the discount window loans have been the primary instrument for the BOJ to fine-tune the overnight supply-demand gaps TB in Japan appeared in 1986 but its transaction market is not as fully developed as the one in the US Fluctuations in borrowed reserves in Japan was much stronger than in the US until the middle of 1995 reflecting the heavy usage of the discount window loans in Japan When we see the change in borrowed reserves from January
Trang 28were considered non-active, the BOJ may feel reluctant to use discount window loans as heavily as it did in the past
However, recent developments in the TB market in Japan make the treatment of discount window loans similar to those in the US After the middle of 1995, the BOJ stopped giving large discount window loans partly due to the situation the discount rate being higher than the overnight call rate, which reduced the demand for the discount loans to almost zero On January 16, 1996, the BOJ announced that it would | abolish the credit lines for the loans with the recent development of market operations that will substitute for the discount window loans
Trang 293.2 Frequency of market operations
For the frequency of the market operations, temporary operations such as RPs and MSPs are dominant
A more striking point is the difference in the number of operations between the US and Japan The BOJ does more than three times as many operations as the Fed does in one year There are two possible reasons that explain this conspicuous difference
Table 3.2 Frequency of implementation of each market operation instruments JAPAN (1
Instrument Total
Tegata operation Purchase 202
Sale 169 TB 193 FB sale 47 CP 31 8 49 25 Total 724 US (1 _ _ s2 an Instrument Total RPs, 162 MSPs 23 Outright purchase 7 Total
Trang 30of central banks is to counteract the above exogenous factors Therefore, as these exogenous factors fluctuate more, the size and the frequency of market operations by central banks are larger and higher Figure 3.2 is the graph comparing the fluctuations of the total of the exogenous factors and its two major components (banknote and treasury) on a weekly basis We see in the figures that the BOJ is faced with higher volatility in these factors than the Fed
There are two major causes for the large gaps in fluctuations The first is about the practice of payment that affects the banknote factor It is a common knowledge that the other forms of payment such as cards or personal checks are far more prevailing in the US than in Japan The second is for the treasury factor and is related to the
existence of the system called treasury tax and loan note option (TT&L) in the US The TT&L accounts are held in the private banks by the treasury department and one of their main functions is to smooth out the fluctuation of the treasury deposit in the Fed What is done on a daily basis is as follows:
Each morning, the Treasury, the New York Reserve Bank, and the Board staffs evaluate the estimated flows through the Treasury's Fed account The Treasury may decide to transfer funds to the Fed by making a "call" on the TT&L accounts if estimates suggest its balance would otherwise be below the target balance or to transfer funds to the TT&L accounts by making a "direct investment" to the accounts if the estimated balance would otherwise be higher than desired (Meulendyke 1998 p156)
Trang 31fluctuations in the treasury balance or not also causes differences in the amount of fluctuation in exogenous factors
The second possible reason is related to the attitude of the central banks to the smoothness of reserves supplied in the market Even when there are large fluctuations in the exogenous factors affecting reserve levels, the number and the amount of market operations may be small if the central bank does not want to smooth out the reserve path Figure 3.3 is the graph comparing the fluctuations of the total reserves Here, we observe that the BOJ tends to smooth out the total reserve path on a weekly basis
Therefore, we state that the BOJ has to make market operations more frequently
than the Fed due to the two reasons mentioned here
3.3 A day in market operation desks
In both of these two central banks, market operation managers implement market operations which have the same-day settlement in the early moming when money markets are active In the US, RPs and MSPs are offered right after the conference call meeting around 10:30, and operation with same-day settlement (Tegata and TB
operations) are offered at 9:20 in Japan
Trang 33Table 3.3 Time Schedule of Market Operations JAPAN
[Actions] [Announcements]
9:20 Tegata operation (same day settlement) TB purchase (same day settlement) * CP purchase
BOS lending
10:00 Realized fund surplus/shortage, BOS operations (for the previous day)
Securities outright purchase (4"" day settlement) Securities with Gensaki purchase (3 day settlement) TB purchase (3 day settlement)
11:00 Tegata operation (next day settlement)
13:00 < Tegata clearing and domestic exchange settlement > BO} lending
15:00 < Settlement at 15:00> BO] lending
17:00 <Final settlement >
17:30 Prediction fund surplus/shortage (for the next day) Preliminary fund surplus/shortage, BOJ operations (for the day)
US
[Actions] {Announcements or meetings]
9:00 or 9:15 Daily dealer meeting
10:20 The conference call with FOMC representatives
10:30 RPs, MSPs **
Outright purchase (at a variety of times)
(generally 3™ day settlement)
15:15 Daily dealer meeting
* In Japan, after | 1/28/1997, the BOJ makes additional offers of operations with the same-day settlement around the midday
Trang 344 Objectives of the daily implementation of monetary policies
In the previous section, we discussed what and how market operations (including discount lending) are implemented in practice It is also useful to discuss the
objectives of monetary policy implementation on a daily basis First, we develop a simple formula for each country to explain the relation between market operations and other variables With these formulas, it is possible for us to better understand what the central banks have in mind when they take actions such as open market operations or discount window loans Then, we move on to discuss the operating target for each central bank and see if the setting of operating targets affects the monetary policy practices
4.1 Relation between the market operations and other variables
First, we discuss the formula the Fed is supposed to have when it does market operations A convenient starting point is the balance sheet of the central banks, shown in Table 4.1 From the equalities of total assets and liabilities, we have:
Table 4.1 Balance Sheet of the central banks
Assets Liabilities
BL (discount window lending) R (member-bank deposits) S (security holdings) CU (currency in circulation) FL (float) DG (treasury deposits) OA (other assets) OL (other liabilities)
(4.1) BL + S+ FL + OA =R+ CU + DG + OL
Trang 35(4.2) NRA =R-BL =(S + FL + OA) - (CU + DG + OL)
where NRA is non-borrowed reserve accounts This NRA is not equal to non borrowed reserves (NBR) since reserves that banks are required to hold against their deposit liabilities may be held as reserve balances in the Fed or as part of the vault cash in the banks Therefore, to obtain total NBR, vault cash used to satisfy reserve requirements (VC) must be added on both sides of the equation
(4.3) NBR = NRA + VC =(S + FL + OA) - (CU+ DG + OL) + VC
The RHS is arranged further to separate the system's securities portfolio from other assets and liabilities
(4.4) NBR = S + (FL + OA) -(CU+ DG + OL) + VC
By taking the first difference, we obtain an identity involving open market operations, defined as OMO = AS:
(4.5) ANBR = OMO + ARF
Trang 36market operations’
There is one thing to be noted about VC Banks may satisfy all or part of their reserve requirements during a given reserve maintenance period with vault cash held approximately two weeks earlier However, for those banks whose vault cash exceeds their reserve requirements, only the amount of vault cash equal to their reserve
requirements (called applied vault cash) is included in the definition of total NBR That is, the applied vault cash is uncontrolled reserve factor noted above as VC We know that total vault cash amount (not applied vault cash) is fixed before the
maintenance period begins due to the two weeks lag Nevertheless, during the maintenance period, the reported data for total vault cash must be adjusted by removing an estimate of vault cash not applied toward reserve requirements Hence, how much of the total vault cash is to be removed is unknown until total required reserves are calculated after the computation period ends (only two days before the
end of the reserve maintenance)’
Next, we discuss the formula the BOJ is supposed to have starting again from the Table 4.1 Corresponding formulas to (4.4) and (4.5) for the BOJ are:
(4.6) R=S+ BL + (FL + OA) -(CU+ DG + OL)
(4.7) AR = OMO + ABL + ARF’
“ The words "dynamic" and “defensive” operations were used in Meek (1982), for example
* However, after 7/30/98, the computation period and the maintenance period with vault cash are
completely overlapped In this case, we have no difficulty to know exactly the amount of applied vault
cash (VC) before the reserve maintenance period begins Therefore, AVC is already fixed with
Trang 37where RF'= (FL + OA) - (CU + DG + OL)
Some of the differences between the Fed and the BOJ operating procedures are observed here The reserve factor in Japan, RF’ , does not have VC in it while the RF in the US has VC This is because applied vault cash is not allowed to be used to meet legal reserve requirements in Japan while it is in the US (See Table 2.2)
Another difference between equation (4.5) and (4.7) is that BZ is not subtracted from R to arrive at NBR In fact, the BOJ has never used the concept of NBR in the past This reflects the BOJ's perception that the borrowed reserve (BR) is a
controllable variable (See Section 3.1) However, after the middle of 1995 the BOJ tries not to use the BOJ lending as an instrument to adjust daily fund shortage/surplus in the market and (4.7) may be modified to explain the recent behavior of the BOJ
The BOJ calls the ARF’ term the surplus (or shortage when it is negative) of funds in the money market The "defensive" operations of the BOJ are directed to offset this term The BOJ devotes considerable effort to estimate this term and reports its
prediction to the public every day Funds are supplied either through the BOJ's discount window, BL, or by OMO For “defensive" operations, both instruments have been used for a long time
Trang 384.2 Operating targets
It is well known that the Fed targeted the FF rate until 1979, NBR from 1979 until 1982, BR from 1982 to 1989 After 1989, the Fed is thought to have returned to targeting the FF rate, although there has been no announcement about the shift in the target However, it seems that the difference lies more in emphasis than in substance Obviously, the Fed is not able to set targets for reserves on a day-to-day or even month-to-month basis and hit them exactly If the Fed tries this, it would create enormous volatility in the FF rate Targeting reserves merely means more frequent adjustments of the "dynamic" part in response to the deviations of actual reserves from the targets, and consequently, more fluctuations in the FF rate than in the case of targeting the FF rate The BR targeting which was adopted in 1982 has since virtually transformed to the FF targeting as mentioned above It is due to the looser correlation between the FF rate and BR in the late 1980s
Trang 39continues to have the old market operation practice of reserves targeting days by limiting the number of operations in one day Therefore, the FF rate fluctuates much more than the days before 1979 to deviate from the targeting level by a large margin
What has been the target of the BOJ's operations? The BOJ never seems to have targeted bank reserves or high-powered money Month-to-month control over bank reserves is almost impossible because of the lagged reserve system and relatively small size of excess reserves (For 1967-87, excess reserves were 1.225% of required reserves in the US and 0.142% in Japan.) Since the mid-1970s, the BOJ has paid attention to the broader monetary aggregates as intermediate targets of monetary policy However, it seems that it has never used information on monetary aggregates to calculate target levels for bank reserves or the call rate
Trang 405 Implications on the liquidity effect
In the previous sections, we have seen the institutional differences in the money markets or in the implementation of monetary policies between the US and Japan However, our primary concern is about the effect of the monetary policy, especially the liquidity effect Therefore, we discuss the implications of the institutional differences on the liquidity effect
Basically, the mechanisms to have the liquidity effect are expected to be the same in these countries, even though there are many institutional differences The most fundamental settings that make the effect possible are:
(1) Multiple days in one maintenance period
(2) Reserve requirement that must be satisfied by the end of a period
Because of these settings in the reserve market, the US and Japan have the same set of two diagrams of demand and supply schedules for required reserves depending on the date in a maintenance period
On the final day of a period, private banks have to satisfy their reserve