IV. Monetary Policy Operation Framework—The Central Bank’s

56
●
Reforms in China’s Monetary Policy
the main reason for the long-term liquidity surplus is an excessive increase in 
liquidity supply by spontaneous factors (see Figure 1.4 ). Among spontaneous 
factors, what can increase in the long run is the change in the central bank’s 
net foreign assets. In reality, the occurrence of liquidity surplus and foreign 
exchange intervention by the central bank in a developed country are usually 
connected with each other. The “sterilization” by the central bank to keep a 
stable level of liquidity usually refers to local currency operations undertaken 
to hedge foreign exchange intervention. Most developed countries adopt a 
floating exchange rate system, and the central bank will intervene in the for-
eign exchange market to a relatively small extent. Therefore, liquidity sur-
plus is not likely to occur. Only a central bank that intervenes in the foreign 
exchange market over the long term has to deal with sterilization.
23
For exam-
ple, the Bank of Japan has intervened in the foreign exchange market over a 
long period, mainly by purchasing US dollars to suppress appreciation of the 
yen and therefore injecting a large amount of liquidity via foreign exchange 
intervention. The Bank of Japan has set targets for increasing commercial 
banks’ balances in accounts held at the central bank, which is in the same 
direction of injecting liquidity via foreign exchange intervention. However, 
due to the relatively large amount of foreign exchange interventions, the Bank 
of Japan faces pressure to withdraw part of the liquidity. For a central bank 
that has not adopted a structural deficit liquidity management framework, 
liquidity surplus may come from the structural liquidity surplus caused by 
institutional arrangements or from the liquidity supply impact due to change 
in spontaneous factors. The operation methods available for a central bank to 
withdraw liquidity are analyzed below on a basis of common sense. 
To reduce liquidity surplus, the central bank can reduce the supply of 
liquidity or increase the demand for liquidity. We first analyze the operation 
methods to reduce the supply of liquidity. Reducing the supply of liquidity 
as shown on the central bank balance sheet can be divided into two methods: 
selling assets and increasing liabilities other than reserves.
24
Asset sales include 
sales of foreign exchange reserves, withdrawing relending and rediscount 
facilities, sales of bonds in the open market, and temporary sales of bonds 
under repo agreements (hereinafter referred to as “repo”). The main method 
for increasing other liabilities is to issue central bank bonds, etc. 
From the operations of central banks in developed countries and emerging 
countries, if the central bank wants to withdraw a temporary liquidity sur-
plus (usually an overnight liquidity surplus) in the banking system resulting 
from prediction error, it will mainly use repos. This situation is very rare. For 
example, the Federal Reserve conducted only ten overnight repos in 2001, 
the Bank of England conducted only one repo in 2002, and the Bank of 
Japan seldomly conducted repo. The repo balance of in the balance sheets of 

Monetary Theory
●
57
central banks in developed countries is basically zero. Given this situation, it 
is much easier for the central bank to sell bonds from time to time under repo 
agreements, and central bank bond issuance is subject to a shortest bond term 
restriction. The central bank cannot, therefore, issue short-term bills to hedge 
overnight liquidity surplus. 
If liquidity needs to be withdrawn in the short or medium-to-long term, 
the main method is to issue central bank bonds.
25
For example, the Bank of 
Japan issues a large amount of short-term Bank of Japan bills to conduct regular 
liquidity withdrawal operations. The Bank of Japan auctions Bank of Japan 
bills three times a day, and by September 2002, it had issued central bank bills 
totaling JPY4.39 trillion. Since the establishment of the Euro zone, the ECB 
has not faced liquidity surplus. However, the ECB regards the issuance of short-
term central bank bills as the preferred option among operation methods to 
withdraw liquidity under its monetary policy operation framework and regards 
such bills as top-grade assets that can be used as eligible collateral for monetary 
policy operations in the euro system. The Bank of Korea has long used mon-
etary stabilization bonds to absorb liquidity.
26
At the end of the 1980s, to with-
draw the liquidity surplus caused by capital inflow, the Bank of Korea issued 
a large amount of monetary stabilization bonds with a maximum balance of 
KRW24.44 trillion, accounting for 21.8 percent of the M2 balance. 
Central banks of developed countries usually purchase bonds when they 
inject liquidity over the long term but rarely sell bonds to withdraw liquidity. 
In fact, the Federal Reserve, the ECB, the Bank of Japan and other central 
banks have barely sold any bonds. 
Central banks lack the motivation to sell bonds, the reason behind which 
is the same as the reason why central banks are inclined to hold more bonds—
central banks reduce excess deposit reserves in liabilities when selling bond 
assets, simultaneously bringing about a decrease in the scale of their assets and 
liabilities. The total assets in a country’s financial system will increase contin-
uously, and the shrinking of the scale of central bank’s assets and the declining 
of the share of the central banks’ assets in the society’s total financial assets 
will weaken the influence of the central bank, which will negatively influence 
the central bank’s ability to control and regulate the financial system. Besides, 
the central bank is reluctant to sell bonds for the following reasons:
(1) The liquidity withdrawal via sale of bonds by the central bank means 
it has to sell bonds on a large scale. Such bond sell-off will obviously 
impact the financial market and bring about great fluctuation in 
prices, which will therefore affect public confidence.
(2) The central bank’s sell-off will lead to violent fluctuations in prices, 
meaning that if the central bank wants to realize the expected sales 

58
●
Reforms in China’s Monetary Policy
volume, it has to bear considerable loss on the price. Moreover, if 
market confidence is seriously eroded, no buyers will be attracted by 
such bonds and the quantitative operating target of the central bank 
will be very difficult to realize. Therefore, it is usually very difficult 
for the central bank to withdraw liquidity by selling bonds on a large 
scale.
(3) The central bank occupies an important position in bond purchases, 
and if it regards bond sales as a major operating instrument, then the 
influence of the central bank on bond market prices and the yield 
curve will be too large, which will affect the price formation mecha-
nism of the bond market and therefore reduce market efficiency.
In sum, if reducing the supply of liquidity to eliminate liquidity surplus, the 
central bank will issue bonds as its main method, in addition to short-term 
sales of bonds under repo agreements. To cope with the liquidity surplus, it 
may increase the demand for liquidity, that is, increase the required reserve 
ratio. In practice, central banks prefer to make adjustments to the liabilities 
structure to reduce liquidity surplus. Issuing central bank bonds and increas-
ing the required reserve ratio are both reflected on the liabilities side of the 
central bank balance sheet. Therefore, the author puts forward the concept 
of the central bank liabilities spectrum and compares these two instruments 
under this concept.

tải về 1.53 Mb.

Chia sẻ với bạn bè của bạn: