Why does the Reserve Bank Set the Interest Rate?

Whittaker, J. B.; Theunissen, Anton

doi:10.1111/j.1813-6982.1987.tb00151.x

Cited by 6 publications

(4 citation statements)

References 9 publications

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“…Table 1. Correlations between First Differences of the Bank Rate and Market Interest Rates, 1973-1992*(6) MARKET 1973-19771978-1982-1987-1992…”

Section: The Resultsmentioning

confidence: 99%

Monetary Control and Interest Rates During the Post‐De Kock Commission Period

Nel¹

1994

South African J Economics

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1) THE CURRENT monetary control mechanism in South Africa, which was implemented on the recommendations of the De Kock Commission (RSA, 1985), is one regulating the cost, rather than the availability of funds at the discount window. As some of the changes associated with the new mechanism were introduced during the early 1980s, and seeing that they were fully in line with the findings of the Commission in 1985, it can be argued that the current period in monetary control started with the appointment of Dr De Kock as governor of the Reserve Bank in 1981. These changes, together with the subsequent appearance of the De Kock Commission's report, coincided with several publications*(2) on the theory of monetary control. After 1986, however, this discipline did not receive the same attention*(3). The new market orientated policy, combined with the above cost of funds-approach, attached great importance to the role of Bank Rate as monetary control instrument. This is illustrated by the independent determination of the Bank Rate since 1983, which is in contrast to the system of a penalty margin above market discount rates before this time. The objective of this change was to strengthen the role of the Bank Rate and to make it instrumental in exercising a greater degree of influence over market rates. Being declared market related, Bank Rate from this time has been set at levels which are seen by the Reserve Bank as appropriate in the light of trends in the financial markets, the business cycle, growth in the money supply, gold and foreign exchange reserves, inflation and the exchange rate. Having opted for the above approach in monetary control*(4), the Reserve Bank requires not only effective influence over the levels of market interest rates, but also the ability to create an environment of general stability in the financial markets. The latter refers more specifically to the avoidance of undue short-term fluctuations from the general cyclical course over time, to which all interest rates are subject. This points to a need for empirical work, firstly on the degree of stability achieved in market interest rates, and secondly

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“…Table 1. Correlations between First Differences of the Bank Rate and Market Interest Rates, 1973-1992*(6) MARKET 1973-19771978-1982-1987-1992…”

Section: The Resultsmentioning

confidence: 99%

Monetary Control and Interest Rates During the Post‐De Kock Commission Period

Nel¹

1994

South African J Economics

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“…Secondly, our argument is that the Bank must always make reserves available and the Bank therefore cannot avoid choosing the interest cost of reserves. Reserves can indeed be supplied in ways which are notionally different from the discount window as we explicitly point out (Whittaker and Theunissen, 1987; p. 247), but this does not imply that the interest rate ceases to be the Bank's instrument. As Dean observes, the discount window is rarely used in some countries, being supplanted by substitute 'instruments' such as open market operations.…”

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confidence: 98%

Does Money Supply Endogeneity Matter?

COMMENT

1989

South African J Economics

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S RESPONSE to James Dean's (1988) criticism of our work (Whittaker and Theunissen, 1987) has prompted us to add some further remarks. Moore has amply dealt with the central issue of endogeneity (a word which we have preferred to avoid because of the difficulties over its meaning), but there remain points in Dean's paper pertaining to the administration of monetary policy which should be challenged. In our 1987 paper, we describe South African monetary policy as setting the short term rate of interest, via the discount windowan observation which Dean accepts. We then argue that the interest rate must be the instrument of the Central Bank in monetary regimes in which commercial banks offer convertibility of deposits to Central Bank fiat currency. We do not argue, as Dean implies that we do, incorrectly, that the SA Reserve Bank is compelled to use the discount window as its sole domestic policy instrument. In the first place, we are not of the opinion that the discount window can be called an instrument; discount window is merely the term used for one arrangement by which a Central Bank can provide reserves to the banking system. Secondly, our argument is that the Bank must always make reserves available and the Bank therefore cannot avoid choosing the interest cost of reserves. Reserves can indeed be supplied in ways which are notionally different from the discount window as we explicitly point out (Whittaker and Theunissen, 1987; p. 247), but this does not imply that the interest rate ceases to be the Bank's instrument. As Dean observes, the discount window is rarely used in some countries, being supplanted by substitute 'instruments' such as open market operations. In Britain, for instance, a shortage of reserves is generally relieved by the Bank of England inviting discount houses to offer it bills for sale. Although this activity is not called discount window lending, the Bank still sets the rate at which it enters into these deals. Finally, we do not conclude, as Dean says we do, that the SA Reserve Bank cannot 'control' the money supply, even in principle. The Bank 'controls' the money supply to. the extent that the money supply responds to changes in the value of the Bank's interest rate instrument. University of Cape Town 1989 SAJE v57(2) p202

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“…The level of the dominant short term wholesale rate is set by the central bank, as the supply price of additional base money to the banking system (in the US it is the federal funds rate, in South Africa the discount rate). Through bank arbitrage, this rate governs the general level of short term market rates (Moore, 1988a, b;Whittaker and Theunissen, 1987). Bank transactions deposits can be exchanged on demand into higher interest-bearing non-transactions deposits.…”

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confidence: 99%

Does Money Supply Endogeneity Matter?

Moore

1989

South African J Economics

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Why does the Reserve Bank Set the Interest Rate?

Cited by 6 publications

References 9 publications

Monetary Control and Interest Rates During the Post‐De Kock Commission Period

Monetary Control and Interest Rates During the Post‐De Kock Commission Period

Does Money Supply Endogeneity Matter?

Does Money Supply Endogeneity Matter?

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