Questionnaire

Central banks in emerging market economies, and developing countries ,moved towards reliance on money market operations for the implementation of monetary policy , and thus followed the trend initiated by industrial countries in the 1970s.

This was the counterpart in the monetary area to the trend toward enhancing the role of price signals in the economy.

These money market operations could be operated to provide liquidity or to absorb liquidity from the market. Theoretically there is no difference between conducting operations to provide or absorb liquidity, but in practices the effectiveness of money market operations is most likely to be somewhat limited if the operations are to absorb liquidity.

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(2) Dealing with structural surplus through operations to withdraw liquidity at the market rates could be considered as a negative incentive for the credit growth.

(3) Structural or systematic operations to absorb liquidity from the market may implicate monetary policy or interfered with its transmission mechanism, since there is no incentive to reduce interest rates.

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(4) If the structure surplus is accompanied by emerging or non developed economies, and financial markets, especially the counterparties of the central bank , it is expected to see practices which may hurt the efficiency of monetary policy ,examples are as follows:

a- The weaknesses in the market infrastructure implies lack of competition resulted in insufficient participation in monetary operations ,at times the inability of the central bank to undertake effective monetary

policy actions to deal with excess liquidity may resulted in fail to achieve the operational target.

4) -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

but the one can conclude that a monetary policy framework with a corridor system its boundaries are the lending and deposit standing facilities rates, reduce the volatility of the market rates.

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Reasons behind structural liquidity surplus

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Two main reasons behind structural liquidity surplus:

(a) Capital inflows

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Transition economies, which have achieved macroeconomic stability , and liberalised capital flows and financial markets, usually face increase inflows of FDI, as they move from state ownership to private ownership (as their nominal interest rates are higher rather than in the developed countries). As these capital inflows are predominantly equity rather than debt ,central banks therefore often sterilizes the liquidity resulted from these capital inflows.

(b) Fiscal dominance

Fiscal dominance and lack of fiscal discipline undermines the investor

Confidence , and makes it difficult for the government securities market to emerge. So fiscal dominance may hamper the effectiveness of money market operations.

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