The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy
This paper analyses the impact of the short‐term component of the new Basel III liquidity standards, namely the liquidity coverage ratio (LCR), on the implementation of monetary policy in the euro area. It employs a conceptual framework to investigate the interaction between the money market and monetary policy implementation. Based thereon, it argues that the isolated focus on the impact on the LCR tends to underestimate the future challenges to monetary policy implementation for two reasons: first, feedback and network dynamics exacerbate the impact of the standard; second, the ongoing crisis itself challenges monetary policy implementation in the euro area by its impact on the (perceived) arbitrage relationship between open market operations and the unsecured money market. The paper concludes by discussing potential policy reactions concerning both, the calibration of the LCR and the framework for monetary policy implementation.
Open Market Operations in the 1990s
Open market operations--the purchase and sale of Treasury and federal agency securities--are the Federal Reserve's principal tool for implementing monetary policy. The objectives and conduct of open market operations have continued to evolve in the 1990s, partly in response to the way the Federal Open Market Committee implements monetary policy and explains it to the public. Also shaping operations have been changes in financial markets, including developments in the market for repurchase agreements and declines in the balances that depository institutions must hold at the Federal Reserve.
Monetary Instability: Are National Currencies Becoming Obsolete?
Nothing signifies the growth of instability in today’s international political economy more than the disruptive financial crises that have swept the world in recent years — the speculative attacks on the pound sterling and other European currencies in 1992-93, which broke up the old European Monetary System; the fall of the Mexican peso in 1994, which sparked a worldwide contagion in financial markets that came to be known as the tequila effect; the East Asian crisis of 1997-98, which began with crash of Thailand’s currency, the baht, and then spread outward in another contagion, which some this time labelled a case of “bahtulism”; the Russian default of 1998; Brazil in 1999; and the continuing troubles of Argentina, Turkey, and others. In just one decade the world’s monetary system has gone to the brink a half dozen times. No wonder there is so much talk — albeit, to date, rather little action — about reform of what we now call the international financial architecture.