Monetary Policy-Making Around the World:
Different Approaches from Different
Central Banks
February 25, 2004
A Professor’s Guide to Economic Data and Monetary
Policy Making
Patricia Pollard
Research Officer and Economist
Federal Reserve Bank of St. Louis
The views expressed do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis nor
the Federal Reserve System
Basic Data on Central Banks
Number of Central Banks
200
171
173
172
173
173
173
173
162
149
150
136
109
100
75
55
50
36
18
20
1900
1910
40
24
0
1920
1930
1940
1950
1960
1970
1980
1990
1995
1996
1997
1998
1999
2000
2001
2002
Central Banks by Staff Size: 2002
5 Largest
5 Smallest
Country
Number of
Workers
Country
Number of
Workers
China
150,000
Nauru
26
Russia
82,000
Brunei
28
Euro System
56,538
Comoros
37
India
29,922
San Marino
43
United States
23,438
Djibouti
51
Mean
3,304
Median
614
Source: Robert Pringle, editor, The Morgan Stanley Dean Witter Central Bank
Directory, (London: Central Banking Publications), 2003.
Monetary Policy Framework
Instruments


- Reserve Requirements
- Official interest Rates
- Open Market Operations
- Direct Controls
Operating
Targets
 Intermediate 
Targets


- Short-term Interest Rate
- Reserve Aggregates
- Monetary Aggregates
- Inflation
- Exchange Rate
Goals
- Price stability
- Sustainable Growth
- High Employment
- Financial Stability
Tactics Strategy
Monetary Policy Framework
•
•
•
•
•
Institutional Arrangement
Goals/Objectives
Targets
Instruments
Policy making Process
Institutional Arrangement
• Who Determines the Framework?
– Government
– Central Bank
– Interaction
• Goal versus instrument independence
Goals of Monetary Policy
• What Can Monetary Policy Achieve?
– Price Stability
– Employment
– Economic Growth
Statutory Objectives of Central Banks
(Bank of England Survey of 94 Central Banks)
No statutory goals
(3%)
Monetary stability
& conflicting (13%)
Only non-monetary
stability (1%)
Only monetary
stability (26%)
Monetary stability &
other non-conflicting
(57%)
Source: Mahadeva and Sterne (2000)
Targets of Monetary Policy
• What Do Central Banks Target?
– Inflation Rate
– Exchange Rate
– Monetary Aggregates
• Who Sets the Target?
– Central Bank
– Government
– Both
Explicit Targets and Who Sets Them: 1998
Survey of 93 Central Banks
Inflation target (55)
17
Exchange rate target
(49)
23
9
15
22
Monetary target (39)
14
28
4
10
1
5
No explict target (5)
0%
Central Bank
20%
Both
Source: Mahadeva and Sterne (2000)
40%
Government
60%
Not Defined
80%
100%
No explicit target
Targets of Monetary Policy
• Who Sets the Target?
– U.S. – No targets set
– Euro Area – ECB defines price stability
• Below but close to 2 percent in medium term
– England – Government
• 2 percent
– Canada – Government and Bank of Canada
• 1 to 3 percent
– Japan – Bank of Japan
• Outstanding balance of current accounts at BOJ
– 30 to 35 trillion yen
Targets of Monetary Policy
• Changes in Targets in 1990s
– Increase in use of targets
• In 1990 57 percent had an explicit target
• In 1998 95 percent had an explicit target
– Increased popularity of inflation target
• 1990
– 5 countries set an inflation target
– 1 country relied solely on an inflation target
• 1998
– 54 countries set an inflation target
– 11 countries relied solely on an inflation target
Explicit Targets: 1990 and 1998
Inflation target
(4)
3
Exchange rate
target (31)
1990
1
17
(84 central banks)
14
Developing
Advanced
Monetary target
(14)
4
10
No explict target
(36)
32
0%
Inflation target
(54)
20%
40%
25
4
60%
80%
16
100%
1998
13
(93 central banks)
Exchange rate
target (50)
22
Monetary target
(40)
18
0%
20%
Source: Mahadeva and Sterne (2000)
13
14
40%
Developing
Transitional
Advanced
15
60%
8
80%
100%
Explicit Targets: 1998 and 2004
Inflation target
(54)
25
Exchange rate
target (50)
22
Monetary target
(40)
18
16
13
15
14
No explict target
(5)
Inflation target
(52)
20%
1
40%
60%
27
Exchange rate
target (41)
80%
16
23
Monetary target
(38)
19
100%
9
13
2004
5
14
No explict target
(1)
Developing
Transitional
Advanced
8
4
0%
1998
13
5
1
0%
20%
40%
60%
80%
100%
Developing
Transitional
Advanced
Instruments of Monetary Policy
• Direct Controls
– Set or limit prices (interest rates)
– Set or limit quantities (amount of credit
outstanding)
• Indirect Controls
– Adjust the underlying demand and supply of bank
reserves
Instruments of Monetary Policy
• Reserve Requirements
– Not used as a policy instrument in most countries
– Bank of Canada does not set reserve requirements
– Bank of England sets a cash ratio deposit, not for
policy purposes.
– Federal Reserve, ECB and BOJ all set reserve
requirements
Instruments of Monetary Policy
• Open Market Operations
– Federal Reserve
• Uses open market operations to meet the target for fed funds
rate
• Once a day
• Repurchases – overnight to 3 months
– European Central Bank
• Minimum refinancing rate sets lower bound for repurchases
• Once a week
• Repurchases – 14 days
– Bank of England
• Repo rate is the rate at which BOE provides liquidity to the
interbank market, sets the Sterling Overnight Interbank Average
Rate (SONIA)
• Several times a day
• Repurchases – 14 days
Instruments of Monetary Policy
• Open Market Operations
– Bank of Japan
• Uses open market operations to meet target for the
outstanding balance of current accounts held at the Bank
of Japan
• Two to three times a day
• Repurchases and outright purchases
• Repos range from 7 days to 6 months
– Bank of Canada
• Uses open market operations to keep the target for
overnight rate within a 50 basis point band
• Once a day if rate is straying from the target
• Repurchases – overnight
Instruments of Monetary Policy
• Standing Facilities
– Facilities that allow financial institutions to borrow
directly from the central bank
• Provide upper bound for official interest rate target
– May allow for lending to the central bank
• Provide lower bound for official interest rate target
– Activated on demand by market participants
– Typically overnight loans only
Instruments of Monetary Policy
• Standing Facilities: Central Bank Lending
– Federal Reserve
• Primary Discount Rate
– Penalty rate, set at 100 basis points above fed funds rate target
– European Central Bank
• Marginal Lending Rate
– Penalty rate, since April 1999 has been set at 100 basis points
above the main refinancing minimum bid rate
– Bank of England
• No typical lending rate
• Late overnight repo facility, penalty rate set at 100 basis points
above the repo rate
Instruments of Monetary Policy
• Standing Facilities: Central Bank Lending
– Bank of Japan
• Basic Loan Rate (Discount Rate)
– Penalty rate, with additional penalties for frequent borrowers
– Bank of Canada
• Bank Rate
– Penalty rate, set at 25 basis points above the target for the
overnight rate
Instruments of Monetary Policy
• Standing Facilities: Central Bank Deposits
– Federal Reserve
• No interest on deposits at the Federal Reserve
– European Central Bank
• Deposit Rate
– Since April 1999 has been set at 100 basis points below the main
refinancing minimum bid rate
– Bank of England
• No interest on deposits at the Bank of England
– Bank of Japan
• No interest on deposits
– Bank of Canada
• Deposit rate set at 25 basis point below the target for the
overnight rate
ECB Key Interest Rates
January 1, 1999 – February 23, 2004
Percent
5.50
Marginal Lending
Rate
5.00
4.50
4.00
3.50
3.00
2.50
2.00
Refinancing
Rate
Deposit Rate
1.50
1.00
0.50
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Bank of Canada Key Interest Rates
January 1, 1999 – February 23, 2004
Percent
6.00
Bank Rate
5.50
5.00
4.50
4.00
Deposit Rate
3.50
3.00
Overnight
Rate Target
2.50
2.00
1.50
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Federal Reserve Key Interest Rates
January 1, 1999 – February 20, 2004
Percent
7.00
6.50
6.00
5.50
5.00
4.50
Discount Rate
4.00
3.50
3.00
Fed funds target
2.50
2.00
1.50
1.00
0.50
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
ECB Key Interest Rates
January 1, 1999 – February 23, 2004
Percent
5.50
Marginal Lending
Rate
5.00
4.50
4.00
3.50
3.00
EONIA
Refinancing
Rate
2.50
2.00
Deposit Rate
1.50
1.00
0.50
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Bank of Canada Key Interest Rates
January 1, 1999 – February 23, 2004
Percent
6.00
Bank Rate
5.50
Overnight
Repo rate
5.00
4.50
4.00
Deposit Rate
3.50
3.00
Overnight
Rate Target
2.50
2.00
1.50
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Federal Reserve Key Interest Rates
January 1, 1999 – February 20, 2004
Percent
7.50
7.00
6.50
Fed funds target
6.00
5.50
5.00
4.50
Fed funds
rate
4.00
3.50
Discount Rate
3.00
2.50
2.00
1.50
1.00
0.50
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Monetary Policy Process
• Who Makes the Policy Decisions?
– Individual (9)
– Committee (79)
• Consensus (43)
• Formal Vote (36)
– Individual votes published (6)
» Japan, Korea, Poland, Sweden, United Kingdom,
United States
Monetary Policy Process
• Who Makes the Policy Decisions?
– Number of People on Policy Board/Committee
•
•
•
•
•
•
Most common is between 5 and 10 members
FOMC -- 12 members (19 participants)
ECB -- 18 members
Bank of England -- 9 members
BOJ -- 9 members
Bank of Canada -- 6 members
Members of Policy Board
60
50
40
55
30
20
10
0
19
Less than 5
5 to 10
8
More than 10
Monetary Policy Process
• How Frequent Are the
Policy Meetings?
–
–
–
–
–
–
–
40 percent meet monthly
34 percent meet weekly
FOMC – 8 times a year
ECB -- Monthly
Bank of England -- Monthly
BOJ – 15 times a year?
Bank of Canada – 8 times a
year
Frequency of Policy Board Meetings
Frequency
# of CBs
Less than quarterly
1
Quarterly
4
More than quarterly
2
Monthly
36
Fortnightly
8
Weekly
30
Twice per week
4
Daily
4
Source: Mahadeva and Sterne(2000)
Monetary Policy Process
• How Frequent Is the Main Instrument Changed?
– Much variation in the frequency with which the main policy
instrument is changed.
– Average changes per year 1999-2003
•
•
•
•
FOMC – 3.8
ECB – 3.0
Bank of England -- 3.6
Bank of Canada – 4.6
Number of changes per year
25
20
15
10
18
15
5
0
18
23
3
0-1
2
3-4
12 or less
> 12
Monetary Policy Process
Number of Changes in Main Policy Instrument
1999-2003
Year
FOMC
ECB
BOC
BOE
1999
3
2
3
6
2000
3
6
3
2
2001
11
4
9
7
2002
1
1
4
0
2003
1
2
4
3
Total
19
15
23
18
Source: Federal Reserve Board
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Changes in the Main Policy Instrument
FOMC – Federal Funds Rate Target
7
6
5
4
3
2
1
0
Source: Bank of England
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Changes in the Main Policy Instrument
Bank of England – Repo Rate
7
6
5
4
3
2
1
0
Source: Bank of Canada
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Changes in the Main Policy Instrument
Bank of Canada – Bank Rate
7
6
5
4
3
2
1
0
Source: Eurostat
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Changes in the Main Policy Instrument
European Central Bank – Main Refinancing Rate
7
6
5
4
3
2
1
0
Monetary Policy Process
• Transparency
– Are changes in policy announced?
– Is the vote published?
– Are minutes of the policy meeting released?
Monetary Policy Process
Indicators of Transparency
FOMC
Announcement
Immediately
Vote Published
Immediately
Minutes Released
•No vote is taken.
Thursday
after next
scheduled
meeting
ECB
BOC
Immediately Immediately
No*
No
BOE
Immediately
No
With minutes
No
Two weeks
after meeting
Want to Learn More?
• Central Bank Websites
– Bank of Canada
• www.bankofcanada.ca/en
– Bank of England
• www.bankofengland.co.uk
– Bank of Japan
• www.boj.or.jp/en
– European Central Bank
• www.ecb.int
– Federal Reserve System (Board of Governors)
• www.federalreserve.gov
– Links to the website of most central banks can be found on
the website of the Bank for International Settlements
• www.bis.org/cbanks.htm
Want to Learn More?
• Books and Articles
– Alexander, William E., Tomas J.T. Balino, and Charles Enoch, “The
Adoption of Indirect Instruments of Monetary Policy, IMF
Occasional Paper No. 126.
– Bank for International Settlements, “Comparing Monetary Policy
Operating Procedures Across the United States, Japan and the
Euro Area,” BIS Papers No. 9, December 2001.
– Mahadeva, Lavan and Gabriel Sterne, editors. Monetary Policy
Frameworks in a Global Context. Routledge Publishers: New York,
2000.
(http://www.bankofengland.co.uk/ccbs/publication/pdf/mpfagcabstra
ct.htm
– Paulin, Graydon, “The Changing Face of Central Banking in the
1990s,” Bank of Canada Review, Summer 2001.
Want to Learn More?
• Books and Articles
– Pollard, Patricia S. “A Look Inside Two Central Banks: The
European Central Bank and the Federal Reserve.” Federal Reserve
Bank of St. Louis Review. January/February 2003.
(research.stlouisfed.org/publications/review/03/01/Pollard.pdf)
– “Central Banking in Other Industrialized Countries, Federal Reserve
Bank of Boston, New England Economic Review, Second Quarter
2002.
(http://www.bos.frb.org/economic/neer/neer2002/index.htm#2)