The Practice of Central Banking in Other Industrialized Countries

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Central banks in larger industrialized countries increasingly favor market operations, the buying and selling of securities, over standing facilities, such as lending and deposit facilities, in conducting their monetary policies. In their market operations, foreign central banks most commonly trade securities issued or guaranteed by their governments and repurchase agreements that are backed by a variety of assets, including private securities and securities denominated in foreign currencies. Some also trade in securities that are issued by other governments or private securities that are guaranteed by governments or financial institutions. In some cases, these securities may be denominated in foreign currencies.

Repurchase agreements (RPs) have come to account for most of the market operations of these central banks in recent years and represent an increasing share of their assets. (1) This greater use of RPs partly reflects their growing importance in financial markets and partly reflects their ability to limit central banks' credit, liquidity, and interest rate risks as they expand their market operations to more assets and agents.

In most of the larger industrialized countries, the ratio of government debt to GDP has been falling, in a few cases to unusually low levels. This development has encouraged central banks to expand their trading of RPs rather than other, riskier instruments. In anticipation of their impending social security and pension deficits, the governments of some of these countries have considered the merits of issuing more debt than they require in order to maintain a market for their securities.

The Sample of Foreign Central Banks

Our survey covers the G-7 countries other than the United States--Canada, France, Germany, Italy, the United Kingdom, and Japan--plus the European Central Bank and the central banks of Australia, Norway, Sweden, and Switzerland. (See Tables 1 and 2 plus the reports for each country.) The current objectives for monetary policy for the central banks of most of the European and the three Commonwealth countries are forms of price stability. The central banks of the Commonwealth countries have a relatively long history of relying on market operations to conduct their policies. The other European central banks and the Japanese central bank relatively recently have begun using market operations more intensively, diminishing their reliance on discount, Lombard, and deposit facilities for managing their supply of base money and for influencing either interest rates or the stock of money. In the past ten years, many of these central banks have gained a greater degree of independence from their governments.

Eligible Assets

The central banks in our survey tend to restrict their list of eligible assets most for their outright purchases. For the purpose of conducting monetary policy, most central banks may purchase securities denominated in their currencies that have been issued or guaranteed by their central government. Some may purchase securities issued by their local governments. Only a few, among them the central banks of Canada and Japan, purchase longer-term government notes and bonds. The Bank of England and the Bank of Japan also may purchase private bills that are guaranteed by the banks that accept them. The Eurosystem can, and the Bank of France and the Bundesbank could, buy high-quality, marketable private securities. Nonetheless, at the end of the 1990s, the Bundesbank held no securities outright, and the Bank of France held only Treasury bills. Since the inception of the European Central Bank (ECB), the Eurosystem of central banks has not purchased securities outright in its refinancing operations.

The balance sheets of the central banks in our sample include longer-term and foreign-exchange assets. Although these positions can represent assets that central banks hold on behalf of their governments, these positions also can represent their own assets. …