【正文】 ? Purchase and resale agreement (repo) – A transaction in which the Bank of Canada offers to purchase Government of Canada securities from primary dealers with an agreement to sell them back (repurchased by dealer) at a predetermined price (plus interest, ., repo rate at the target overnight rate) the next business day. – Used to influence the market i at a lower desired level. – This is similar to a collateralized loan obtained by an FI from the Bank of Canada. – NOTE: The Bank initiates SPRAs daily (at 11:45 .) if overnight funds are generally trading above the target rate (it uses repos), which will decrease the interest rate 22 ?Sale and repurchase agreement (SRA) or Reverse repo A transaction in which the Bank of Canada offers to sell Government of Canada securities to designated counterparties with an agreement to buy them back at a predetermined price the next business day. Used to influence the market i at a higher desired level. For example, if the overnight rate is too low relative to the target rate, the BofC uses reverse repos, in which it sells (low price, say $1000) government of Canada securities to primary dealers within agreement to buy them back (say $1,000 + interest) on the next business day. Primary dealers are the designated counterparties. 23 ? Mechanics of BofC intervention via SPRAs and SRAs Step 1. Initially BofC announces changes in the target for overnight rate at 9 AM Step 2. To reinforce the target BofC may intervene in the overnigth market via SPRA (repo) or SRA transaction: 11:45 am See next slide 24 Simulated scenario with open market operations by the BofC using SPRAs to lower its target overnight interest rate from % to % (20Jan04) (See Fig 3) Assume that the bank rate is 3%. Assume further that the BofC observes that inflation is falling down to the lower limit of the acceptable range of 1 percent per annum (alternatively, that the primary dealers are consistently trading at interest rates near the bank rate of 3%, and this is appreciating the Can$ such that Canadian exports have been consistently decreasing, slowing the expected economic growth rate) Therefore BofC wishes to loosen the money supply. It does by announcing at the beginning of the day that is adjusting the Bank Rate down to %. The target rate shifts from % to %. The new operating band is within the range [%%]. To reinforce its new target rate, and to prevent banks from continuing to trade interbank deposits near the top of the operating band, BofC enters the market for repos. It purchases government securities (say $100 million) to primary dealers at the targeted rate (midpoint) of % with an agreement that the sellers (primary dealers) will repurchase them one business day later. The repos or SPRAs increases dealers’ settlement balances by $100, which have to be neutralized (see next slide) Since the market for overnight funds was previously trading above % , banks that expect deficit of liquidity for the day will take advantage of the BofC’s SPRAs, paying % percent. 25 Step 3. Neutralization operation by BofC (to offset changes in SB due to repurchase transactions) How? By Government Deposit Shifting: At pm If no other transaction occurs during the day that affect the aggregate clearing balances of direct clearers, BofC must, in the afternoon, neutralize the effect on aggregate clearing balances of its purchase of SPRAs. BofC shifts government deposits from direct clearers by $100 to its own account, bringing the clearing balances amount back to zero in aggregate. 26 ib = 3 % ior S* = Net supply of SB other than those obtained by standing facilities = 2189。 % S* i*or= 2 190。 % i*or= 2 189。 % ior Quantity of Money (Q) Q* i*’or= 2 189。 For example, if BofC wishes to decrease the clearing deposits (SB) of direct clearers, it moves government deposits from direct clearers from their own liabilities to increase the government deposits of BofC. The result is that the direct clearer decreases a liability (Government deposit) and decreases an asset (SB). 5. Swaps with the Exchange Fund Account Used to bring temporary changes in settlement balances on the accounts of FIs. The EFA can also be used by the BofC to prevent undesirable changes in the exchange rate. For example, given the current situation of strong Can$, a strategy that can be followed by the BofC (or Canadian firms and/or FI), is to buy US$. ? Depreciation of Can$ ? Increases in Canadian exports ? increase in economic growth. 32 Goals of Moary Policy ? High Employment ? Economic Growth ? Price Stability. “In 1923, a German housewife burned mark notes in her kitchen stove, since it was cheaper to burn marks than to use them to buy firewood” (A guide to understanding money