Monetary operations typically aim to achieve monetary stability; but, under this broad umbrella, the monetary authorities need to decide which specific targets to aim at, and which policy instruments should be used. For most countries the final long-term monetary target of the central bank is low and stable inflation. For operational purposes, however, the day-to-day target is usually to achieve a particular level of interest rates, commercial banks’ reserves or the exchange rate. In market economies it is widely held that in the long run the most efficient instruments of monetary policy are those which best complement the workings of a market system. This is why indirect and market-based instruments are preferred to administrative controls. The latter may work for a while, but tend to distort markets and are open to evasion. This handbook examines the various different indirect instruments - i. reserve requirements, which have some of the characteristics of administrative controls; ii. open market operations; and iii. standing facilities. The last two types of instruments are market-based (voluntary) transactions. Open market operations are undertaken at the initiative of the central bank whereas standing facilities are used at the initiative of the commercial banks. The Handbook then discusses how different instruments may be combined in an overall framework for monetary operations. A certain amount of detail is given about current practice in the United Kingdom (UK) and in other countries, not to be prescriptive but to give some impression of the varying balance of instruments in the monetary policy framework of different countries. Since monetary operations are continuously evolving, some of the detail described herein as current practice may become out-of-date, but the general principles and analysis should remain valid. This handbook is also available in Russian, Spanish and Arabic.
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