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1、,Chapter 17,Tools of Monetary Policy, 2005 Pearson Education Canada Inc.,Overview,So far we derived a multiplicative relation between M and MB M = m MB and discussed three monetary policy tools that the Bank of Canada can use to manipulate i and M. These tools are open market operations Bank of Cana
2、da advances, and government deposit shifting In recent years, however, the Bank conducts policy by setting an operating band for the overnight interest rate ior and targeting ior at the midpoint of the band. In doing so, the Bank permits M to do whatever necessary to keep ior on target.,2, 2005 Pear
3、son Education Canada Inc.,The Role of Money,Before we go on, we have to clear up a potential confusion: Although the Bank of Canada can control both i and M, it would be wrong to view i and M as distinct policy instruments. The reason is that a given i policy has to be supported by a given M policy.
4、 That is , the Bank influences i by adjusting M. To put it differently, i is the price of M and the Bank affects the price of M (that is, the interest rate) by controlling the quantity of money. With this in mind, lets discuss the institutional framework within which the Bank conducts monetary polic
5、y.,3, 2005 Pearson Education Canada Inc.,The Large Value Transfer System, LVTS,The LVTS (introduced on February 4, 1999) is an electronic, real-time net settlement network, designed to provide immediate finality and settlement to time-critical transactions LVTS participants know in real time their l
6、arge-value, wholesale transactions (over $50,000). Although these transactions account for less than 1% of the total number of transactions, they account for about 94% of the value of transactions in Canada The LVTS uses multilateral netting only the net credit or debit position of each participant
7、vis-vis all other participants is calculated for settlement,4, 2005 Pearson Education Canada Inc.,LVTS Participants,As of November 2002, in addition to the Bank of Canada, there were 13 LVTS participants - members of the CPA who participate in the LVTS and maintain a settlement account at the Bank o
8、f Canada. These are: Big Six, Alberta Treasury Branches, Bank of America Canada, Banque Nationale de Paris Canada, La Caisse centrale Desjardins du Qubec, Credit Union Central of Canada, HSBC Bank Canada, and the Laurentian Bank of Canada.,5, 2005 Pearson Education Canada Inc.,Systemic Risk,The LVTS
9、 has been put in place to eliminate systemic risk. In fact, participants can make a payment only if they have positive settlement balances in their accounts with the Bank of Canada, posted collateral (such as T-bills and bonds), or explicit lines of credit with other LVTS participants,6, 2005 Pearso
10、n Education Canada Inc.,Real-Time Settlement Systems in Other Countries,CountryYear introduced U.S.(Fedwire)1918 Sweden 1986 Germany and Switzerland 1987 Japan 1988 Italy 1989 Belgiumand U.K. 1996 France, Hong Kong, and NL1997,The LVTS has been put in place in order to eliminate systemic risk the ri
11、sk to the entire payments system due to the inability of one bank to fulfill its payment obligations in a timely fashion. Of, course it is not just Canada that is concerned about systemic risk.,7, 2005 Pearson Education Canada Inc.,Non-LVTS Transactions,These are non-LVTS (paper-based) payment items
12、, such as cheques These items are cleared through the Automated Clearing Settlement System (ACSS), an electronic payments system also operated by the CPA The ACSS aggregates interbank payments and calculates the net amounts to be transferred from and to each participants settlement account with the
13、Bank of Canada,8, 2005 Pearson Education Canada Inc.,Direct and Indirect Clearers,Direct Clearers: The subset of LVTS participants who participate directly in the ACSS and are known as direct clearers Indirect Clearers: These are the deposit-taking financial institutions that are members of the CPA
14、but do not have a clearing account with the Bank of Canada. Indirect clearers hold deposits in direct clearers in exchange for a variety of services, including cheque clearing, foreign exchange transactions, and help with securities purchases,9, 2005 Pearson Education Canada Inc.,The Operating Band
15、of 50 Basis Points for the Overnight Interest Rate,The upper limit defines the bank rate the rate the Bank charges LVTS participants that require an overdraft loan to cover negative settlement balances The lower limit is the rate the Bank pays to LVTS participants with positive settlement balances,1
16、0, 2005 Pearson Education Canada Inc.,The Banks Standing Liquidity Facilities,At the end of each day, each LVTS participant must bring its settlement balance with the Bank close to zero. The Bank therefore stands ready (we call this standing liquidity facilities) to provide or absorb liquidity with an overnight duration to participants facing unforeseen liquidity shocks. The initiative is on the side of the LVTS participant. A participant may use the Banks lending facility to obtain (against
