RDP 8702: Open Market Operations in Australia: A U.S. Perspective 1. Introduction

This paper presents an analysis of the daily operating procedures of the Reserve Bank of Australia and the resulting interaction between the Reserve Bank and the official money market in Australia. The basic conclusion is that the Reserve Bank of Australia uses its open market operations to regulate reserve pressures in the official money market in order to obtain short-term interest rates that are consistent with the objectives of monetary policy. This policy is quite similar to the Federal Reserve's policy of targeting borrowed reserves, in that each monetary authority focusses closely on interest rates in implementing policy, but does not directly peg the interest rate.

While the procedures followed by both the Reserve Bank of Australia and the Federal Reserve are analytically similar, the actual workings of the two overnight money markets have some interesting differences. Of particular interest are the differences between the way in which reserve requirements are satisfied, the role that dealers play in the respective markets and the implementation of discount window lending by the two central banks. Although these major differences have interesting effects on the daily functions of the respective overnight money markets as well as the daily operating strategies of the two central banks, the similar focus on interest rates in implementing monetary policy implies that the macroeconomic transmission mechanisms of monetary policy are roughly equivalent. Therefore under the current operating procedures followed by each central bank, there exist strong analytical similarities between the two monetary policies.

These similarities can be viewed by imbedding some of the key features of the Australian money market and Reserve Bank operating procedures in a simple macroeconomic model. The model used is similar to McCallum (1981), McCallum and Hoehn (1983), and Dotsey (1987) and therefore allows for direct comparison between the qualitative features of U.S. and Australian monetary procedures.

The structure of the paper is as follows. In Section 2 an examination of the volatility of daily interest rates is presented. The behaviour of these rates along with amount of financial churning undertaken by the two central banks is indicative of the role played by interest rates. Section 3 contains an in-depth description of the daily workings of the official Australian money market. Comparisons with the U.S. system are made to highlight the major differences, but the majority of the discussion is focused on the Australian system. In Section 4 the essential characteristics of the Australian system are incorporated into a simple macroeconomic model in order to investigate the effects that monetary policy has on the eonomy. Section 5 summarises the paper.