From Direct to Indirect Monetary Policy Instruments: The French Experience Reconsidered

IMF Working Papers, March 1, 1991

Source details

Canonical URL

From Direct to Indirect Monetary Policy Instruments: The French Experience Reconsidered

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Marc G Quintyn
• Published: March 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451979169.001

Executive summary

• If not carefully planned, the transition to indirect monetary policy instruments may result in a loss of control.
• The 1967-71 attempt in France failed because of a misconceived instrument-mix and sequencing.
• Credit controls, reintroduced in 1972, were only formally abolished in 1987.
• The paper attributes the successful 1987 reform to changes in the policy framework in the 1980s.
• The interest rate was already the key instrument because direct controls became less effective and because of the priority given to the exchange rate objective.
• Consequently, the 1987 transition was from pegging to guiding the interest rates.
• Empirical evidence underpins this interpretation.

Key findings and empirical evidence

• The 1967-71 reform attempt failed due to a misconceived mix of instruments and poor sequencing.
• Reintroduction of credit controls in 1972 indicates the earlier attempt did not produce sustained indirect-instrument functioning.
• Formal abolition of credit controls occurred in 1987, marking a completed transition only after significant policy-framework shifts in the 1980s.
• The shift in practice was characterized less by a sudden adoption of new tools than by the de facto role of interest-rate management emerging as direct controls lost effectiveness.
• The exchange rate objective’s priority reinforced the interest rate’s centrality, making the 1987 change effectively a move from pegging toward guiding interest rates.
• Empirical analysis in the paper supports this interpretation (details of empirical methods and results are contained in the working paper).

Policy implications and lessons

• Transitions to indirect monetary instruments require careful planning of instrument mix and sequencing to avoid loss of control.
• Changes in the broader policy framework can be decisive in enabling successful transitions from direct to indirect instruments.
• Ensuring the effectiveness of the interest-rate channel may depend on diminishing returns to direct controls and alignment of other policy objectives (for example, exchange rate priorities).
• Policymakers should recognize that transitions may involve a practical shift in how instruments are used (e.g., from pegging to guiding interest rates) rather than a simple replacement of tools.

Subjects and keywords (as stated in the source)

• Subjects: Bank credit, Banking, Credit, Credit controls, Demand for money, Monetary policy, Money, Reserve requirements
• Keywords: administered interest rate policy, Bank credit, Credit, Credit controls, DEM interest rate, Demand for money, determination process, Global, interest rate, interest rate function, interest rate instrument, interest rate management, interest rate movement, intervention rate, money market rate, money stock, reaction function, rediscount window, Reserve requirements, WP

Marc G Quintyn. "From Direct to Indirect Monetary Policy Instruments: The French Experience Reconsidered", IMF Working Papers 1991, 033 (1991), March 1, 1991.