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http://www.debunking-economics.com/P...usMoney%20.pdf
Good read at 108 pages..
-Sapiens
Abstract
The essence of this thesis is to examine the economics of interest rate targeting
and the endogeneity of liquidity within the day-to-day implementation of
monetary policy in Australia. In contrast to proponents of an exogenous
money supply, this thesis provides a technical account of the operating
procedures and institutional settlement framework surrounding the
implementation process, and more generally the dynamics of the broader
money and financial markets. The thesis also incorporates an examination of
the Reserve Bank literature, and current and historic time series data. A
contribution to the literature is provided in terms of a balance between theory
and the more technical aspects to the implementation of monetary policy.
Contributions to the literature are provided by the findings presented within
chapters two and three.
Chapter two provides an examination of the relationship between the Reserve
Bank and the banking system in the determination of the system-wide supply
and demand for liquidity. The main findings of chapter two suggest that the
supply of system-wide liquidity fully accommodates the demand for systemwide
liquidity in order to maintain stability in the Reserve Bank’s official
short-term interest rate target. Manipulation in the supply of system-wide
liquidity in the banking system is not required to move official short-term
interest rates. OMO fully accommodates the demand for system-wide liquidity
regardless of the level of end of day cash balances the banking system desires
to hold in their ES accounts with the Reserve Bank. As to maintain stability in
official short-term interest rates, the supply of system-wide liquidity becomes
endogenously determined by the demand for system-wide liquidity. Chapter
two provides a detailed, technical, and holistic account for understanding the
endogenous nature of OMO within the broader market for short-term funds.
Chapter three provides an examination of the relationship between commercial
banks during the inter-bank RTGS day. The main findings of chapter three
suggest that the Reserve Bank is able to move official short-term interest rates
through the use of pre-determined interest rates bands that pay 25 basis points
either side of the official inter-bank cash rate target. Changes to this interest
rate band simultaneously move official short-term interest rates and reinforce a
new target rate announced by the Reserve Bank. Movements in official shortterm
interest rates are not a consequence of the manipulation to the supply of
liquidity. Rather, commercial banks determine the demand for liquidity and
the Reserve Bank fully accommodates their demand via an intra-day and an
overnight repurchase agreement facility. Thus, at every stage of the settlement
process, the supply of liquidity fully accommodates the demand for liquidity
but at a cost influenced and set directly by the Reserve Bank.
6
The essence of this thesis is to examine the economics of interest rate targeting
and the endogeneity of liquidity within the day-to-day implementation of
monetary policy in Australia. In contrast to proponents of an exogenous
money supply, this thesis provides a technical account of the operating
procedures and institutional settlement framework surrounding the
implementation process, and more generally the dynamics of the broader
money and financial markets. The thesis also incorporates an examination of
the Reserve Bank literature, and current and historic time series data. A
contribution to the literature is provided in terms of a balance between theory
and the more technical aspects to the implementation of monetary policy.
Contributions to the literature are provided by the findings presented within
chapters two and three.
Chapter two provides an examination of the relationship between the Reserve
Bank and the banking system in the determination of the system-wide supply
and demand for liquidity. The main findings of chapter two suggest that the
supply of system-wide liquidity fully accommodates the demand for systemwide
liquidity in order to maintain stability in the Reserve Bank’s official
short-term interest rate target. Manipulation in the supply of system-wide
liquidity in the banking system is not required to move official short-term
interest rates. OMO fully accommodates the demand for system-wide liquidity
regardless of the level of end of day cash balances the banking system desires
to hold in their ES accounts with the Reserve Bank. As to maintain stability in
official short-term interest rates, the supply of system-wide liquidity becomes
endogenously determined by the demand for system-wide liquidity. Chapter
two provides a detailed, technical, and holistic account for understanding the
endogenous nature of OMO within the broader market for short-term funds.
Chapter three provides an examination of the relationship between commercial
banks during the inter-bank RTGS day. The main findings of chapter three
suggest that the Reserve Bank is able to move official short-term interest rates
through the use of pre-determined interest rates bands that pay 25 basis points
either side of the official inter-bank cash rate target. Changes to this interest
rate band simultaneously move official short-term interest rates and reinforce a
new target rate announced by the Reserve Bank. Movements in official shortterm
interest rates are not a consequence of the manipulation to the supply of
liquidity. Rather, commercial banks determine the demand for liquidity and
the Reserve Bank fully accommodates their demand via an intra-day and an
overnight repurchase agreement facility. Thus, at every stage of the settlement
process, the supply of liquidity fully accommodates the demand for liquidity
but at a cost influenced and set directly by the Reserve Bank.
6
-Sapiens