Operational Framework of Monetary Policy in SEACEN Countries
Based on the survey of 12 SEACEN members, a number of common and general trends can be detected in relation to the operational framework of monetary policy in the SEACEN countries. Firstly, it was found that price stability is the most important objective of monetary policy and many central banks focus more on interest rates rather than bank reserves, due to the increased importance and flexibility of the price mechanism. Many central banks are increasingly concentrating more on the short-term interest rate, through which central banks can now have greater impact, given payment and settlement arrangements. Secondly, SEACEN countries have increased the market orientation of their instruments. In most cases, a higher proportion of reserves aew now supplied through operations in open markets, with the use of standing facilities limited to providing marginal accommodation or serving as an emergency finance. Consequently, the use of reserve requirements and standing facilities are now rather limited in many SEACEN countries. Thirdly, domestic repos are used in a major way for day-to-day management of liquidity, and the diversity and variety of instruments used in many SEACEN countries have grown tremendously. The structural VAR with the Fisher relation can provide timely estimates of expected inflation and the corresponding ex-ante real rates for the SEACEN countries, and can also give a proper measure of monetary policy stance. The estimates were done for the purpose of a comparative analysis. However, it should also be noted that applying this approach to each country needs further prior studies and investigation such as a time-series analysis on the interest rate movement to find out whether actual nominal interest rate is closely consistent with the Fisher relation. The practical use of the measures may also be determined on country basis by the monetary policy framework, and other indicators of information set currently used.
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