Abstract

Monetary Policy as Liquidity Policy. A proposal for the reorganization of the instruments of monetary policy

The lacking success of monetary policy is due above all to the fact that the central bank cannot control the quantity of money, changes in the quantity of money take place largely endogenously, and the instrumentarium is oriented too closely to the quantity of money and interest rates, instead of to liquidity. In this connection, liquidity of the commercial banking system must be understood as the sum of primary and secondary liquidity, i.e. the availability of central bank money and such assets as can be converted at any time into central bank money. Since in the past the banks mostly had a substantial amount of surplus liquidity, they were in a position to satisfy additional demand for money and credit even when this ran counter to the intentions of the central bank. The surplus liquidity is simultaneously an important factor for explaining the varying duration of time-lags of monetary policy. Hence the goal of a restrictive monetary policy can be attained only if that policy succeeds in controlling the liquidity of the private banking system (and of the whole economy) in the necessary manner and in limiting it quantitavively. To this end it is necessary to pattern the instruments of monetary policy, , so that they are more adequate for achieving their goals. The present instruments are based on inadequate conceptions of monetary theory, are too ineffectively co-ordinated with each other and, in part, unsuitable. The following reorganisation proposal is therefore made: 'The monetary policy instrumentarium should centre around uniform refinancing quotas for the commercial banks; these quotas would replace the present rediscount quotas, collateral credits and facilities for the return of money market papers. The level of the quotas and the refinancing rate constitute a double instrument for the central bank, which is supplement by minimum-reserve policy. For fine adjustment, use should be made of open-market policy, the character of which would change, however, on account of the lack of any possibility to return money market papers. The financial relations between the government and the central bank should also be reorganized. In lieu of central bank cash advances, provision shoul be made for cyclical credits. Moreover, central bank pofits ought to be used in the service of monetry policy. To control influences exercised by foreign trade on the quantity of central bank money and liquidity, various instruments must be employed. The liquidation of credit balances abroad and the taking up of credit abroad by banks may, if necessary, be counted as part of the refinancing quota. Deposits of nonresidents can be made subject to high minimum reserves. To eliminate the inadequacies of the cash deposit requirements and regulate imports of capital for the purchase of domestic securities, it is possible to employ tax measures which, if appropriately designed, are capable of hindering even speculative inflows of foreign exchange in the event of an anticipated rise in the exchange rate. However, complete protection of the foreign trade flank and elimination of fundamental disequilibrium of exchanges rates cannot be attained with the means of monetary policy alone. The outlined instrumentarium ıs largely self-contained and compatible with the market economy system. It leaves the private banking sector a relatively high degree of elasticity and makes the problematical expedient of imposing credit ceilings unnecessary