Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks

IMF Working Papers, February 7, 2020

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Paper discusses operational issues for countries that want to reform their monetary policy frameworks.
Argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages.
Concludes that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy.
Discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission.
Discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liquidity management capacity is weak.

Stabilizing short-term interest rates on a day-to-day basis improves operational effectiveness and policy transmission.
Short-term interest rates should generally be the daily operating target rather than reserve money, even for money-targeting frameworks.
Combining a monetary-aggregate-based policy formulation with an interest-rate-focused operational framework can enhance predictability and transmission of monetary policy.
Special operational configuration is required when markets are underdeveloped and liquidity management capacity is weak.

Use short-term interest rates as the primary daily operating target in most cases.
Design operational frameworks that ensure stable and predictable short-term market rates to improve policy transmission.
For countries relying on monetary aggregates, maintain monetary-aggregate targets at the policy formulation level while operating daily with interest-rate stabilization.
When market development and liquidity management capacity are limited, tailor the interest-rate-based operational framework to local market structure and capacity constraints.

Subject: Banking, Central bank policy rate, Financial markets, Financial services, Interbank markets, Interbank rates, Monetary base, Money, Short term interest rates
Keywords: Africa, allotment system, central bank, central bank credibility, Central bank policy rate, firm interest rate corridor, interbank market interest rates, interbank market rate, Interbank markets, Interbank rates, interest rate, interest rate determination, Interest rate spread, liqudity management, liquidity forecasting capacity, market rate, Monetary base, monetary policy, monetary policy operations, monetary policy transmission, monetary targeting, overnight interbank market rate, policy rate, rate, Short term interest rates, targeted market rate, trough central bank term-lending, WP