Australian Monetary Policy
ES balances) and transactions undertaken by the RBA with market participants (including the unwind of repurchase agreements – see below – arising from previous operations).
The RBA's domestic market operations determine the aggregate supply of ES funds and are designed to ensure that supply equals demand at the target cash rate. If the supply is too high, holders of ES funds will wish to lend their excess funds in the overnight market, putting downward pressure on the cash rate. If the supply is too low, they will wish to borrow, putting upward pressure on the rate. The RBA's open market operations, together with other elements of the framework used for the implementation of monetary policy in Australia, have proved very effective when measured by the stability of the cash rate around the target. Over the 2002/03, the average absolute deviation of the cash rate from its target was less than one basis point.
Despite the broadening of the range of domestic securities in which the RBA is willing to deal, the strong growth in the RBA's balance sheet coupled with greater seasonal concentration of flows between the RBA and the private sector has meant that the RBA has had to augment its open market operations with foreign exchange swaps. Such transactions may be unwound within a very short period or rolled forward on a short-term basis.
6 Fractional Reserves
Commercial banks are required to keep a proportion of their deposits as reserves. The RBA has the power to change reserve requirements on bank deposits within legislatively set bounds. Superficially, reserves are required for safety, to meet emergency cash needs. However, safety is not the motivation for reserve requirements. Requires commercial bank reserves on deposit at the RBA, allows RBA to control the money supply and related monetary conditions by changing reserve requirements.
If reserve requirements were to be reduced, the excess in commercial banks would most likely be lent out and will reduce interest rates, supply of money will also increase and level of economy can be stimulated. A curious aspect of fractional reserves system is that every dollar of excess reserves can create more the 1 dollar change in the money supply.
Any interjection of reserves into the banking system has a multiple impact upon the money supply. The RBA must factor this multiple into its calculations when implementing monetary policies. Estimating this multiple is imprecise because of the unknowns and will add to the difficulty of implementing policies. (M. Livingston, 1993)
References
1 Asia-Pacific Economic Cooperation, “Economic Report Australia”, Economic Outlook, 2002, http://apecsun.apecsec.org.sg/member/memberecreport/aus.html
2 2003, http://www.rba.gov.au/MonetaryPolicy/about_monetary_policy.html
3 Tobin, J. “The Concise Encyclopedia of Economics”, The Library of Economics and Liberty, 2003, http://www.econlib.org/library/Enc/MonetaryPolicy.html
4 Sloman, John. “Economics”, 4th Edition, Prentice Hall, 2000
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