Monetary policy: Implementation in the money market
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Monetary policy: Implementation in the money market

Worksheet 2

In-depth study

The following exercises will help you gain a deeper understanding of the interrelationships explained in the video ‘Monetary policy: Implementation in the money market’. They are based on the exercises in the ‘Fundamentals’ worksheet.

An overview chart of monetary policy measures since the period before the 2007/2008 financial crisis to the present day is provided to help with the following exercises.

Please note that for some exercises, you will need to do your own internet research as well.
Please also note that the term ‘central bank money’ is shortened to CBM.

 


Environment with little CBM before the 2007/2008 financial crisis

 

    1. 1)

    1. How did the implementation of monetary policy in the money market work before the 2007/2008 financial crisis in an environment with little CBM: How did the SNB manage liquidity in the money market at that time? Explain.

    1. 2)

    1. Describe the monetary policy instrument of open market operations using the example of liquidity-providing repo transactions, where repo stands for repurchase agreement. If necessary, consult the Q&A or Glossary sections of the SNB website (snb.ch) under Digital services, as well as other trusted internet sources.

 

 

 

 

 

 

 

 

2007/2008 financial crisis

 

    1. 3)

    1. Explain why the period of the financial crisis was particularly delicate from a monetary policy perspective. How did the SNB deal with it?

    1. 4)

    1. Describe the effects of an SNB foreign exchange market intervention on the money market and the SNB’s foreign currency investments when buying or selling foreign currencies. If necessary, consult the Q&A or Glossary sections of the SNB website (snb.ch) under Digital services, as well as other trusted internet sources.

    1. 5)

    1. Explain how the SNB’s negative interest works.

 

Environment with plenty of CBM before the 2007/2008 financial crisis

 

    1. 6)

    1. The SNB took unconventional monetary policy measures during the 2007/2008 financial crisis and thereafter. Describe the impact on CBM holdings.

    1. 7)

    1. The unconventional monetary policy provides commercial banks with so much CBM that they no longer have to come to the SNB in order to fulfil their regulatory requirements. In this situation, interest rates in the money market can no longer be steered via the supply of CBM. Instead, the SNB must move to direct remuneration of CBM. The remuneration of CBM is a monetary policy instrument.

      Explain how steering money market interest rates via direct remuneration of CBM works in practice, including the role of what is known as arbitrage.

    1. 8)

    1. The SNB remunerates some of the CBM at a discount. What does this mean, and what is the effect of such ‘tiered remuneration’? Explain.

    1. 9)

    1. If the SNB were to remunerate all CBM at the SNB policy rate, money market activity would cease. Why is this so? Explain.

    1. 10)

    1. To ensure that SARON remains close to the SNB policy rate, the SNB must reduce the stock of (surplus) CBM by means of liquidity-absorbing open market operations in addition to tiered remuneration. Why is this so? Explain.

    1. 11)

    1. Which liquidity-absorbing open market operations does the SNB use as a complement to tiered remuneration? How do these liquidity-absorbing open market operations work? Describe them.

    1. 12)

    1. Do unconventional monetary policy measures such as foreign exchange market interventions still play a role to this day? Explain briefly.

    1. 13)

    1. Would a return to the old days of structural liquidity shortage be possible? Describe the specific measures that would be necessary for this change and the potential impact.