Central Banks' use in East Asia of Money Market Instruments in the Conduct of Monetary Policy

Abstract

The paper examines the greater use in the past decade of money market instruments in the conduct of monetary policy by the central banks, or their equivalent, in six of the main East Asian developing economies. Some of these economies have been successful in using various money market instruments to control liquidity, while others have been much less successful. A common theme in the case of the successful economies has been one of employing money market instruments that have yields based on actual market demand and supply. In those cases where the yields have been unrealistic due to not being based on market conditions, the open market operations have generally not been successful. Indonesia's past experience would be an example of this. Based on the experience of these economies, it is suggested that a viable market in treasury bills issued by the national government--not the central bank--be developed for the central bank's use in its monetary policy operations. The advantages of a well-developed open market operation over other traditional monetary policy instruments are cited near the end of the paper.