Implementation and tactics of monetary policy

Operating procedures are the least conspicuous facet of monetary policy. Much academic and public attention is constantly devoted to debating the ultimate objectives and strategic aspects of policy. Questions such as "should price stability be the sole ultimate goal?" or "should the central bank adopt a monetary, exchange rate or inflation target?" invariably steal the thunder. In contrast, not much thought is normally given to issues relating to day-to-day or month-to-month implementation of policy and to the corresponding choices regarding operating objectives, tactics and specific instruments.

While to some extent understandable, this relative neglect is unfortunate for a number of reasons. First, it breeds the perception that operating procedures can be taken for granted. Yet ensuring that the central bank has adequate control over monetary conditions is no easy task. Second, it encourages the view that operating procedures are of no consequence. Yet the strategic aspects of policy need to be supported by an appropriate operating framework. Moreover, how policy is implemented can have significant implications for the organisation and functioning of money and even capital markets as well as for asset price volatility. Third, it risks giving rise to potential misconceptions among parts of the academic profession. Typical examples include the common view that the monetary base is the key concept in the determination of interest rates; that reserve requirements are necessary, or predominantly used, for monetary control; that the marginal demand for bank reserves can be thought of as a function of the volume of deposits; or that the central bank controls interest rates by mechanically supplying a certain volume of funds to meet a generally wellbehaved demand for monetary base or bank reserves. Finally, a proper understanding of operating procedures could throw light on the ultimate power of the central bank to affect monetary conditions, on its source, changing characteristics and reach in the wake of the profound changes taking place in the financial environment.

Against this background, the present volume revisits the subject of operating procedures, a topic last discussed in detail at the Central Bank Economists' Meeting in 1985. For central bankers, it is an opportunity to take stock of how operating procedures have evolved over the last decade or so, of the differences that still divide them and of the forces that may shape future changes. For academics, the contributions contain pointers for deeper and better focused research in the area as a guide to policy-making.