The economics of intervention in the short-term money market

Abstract

The Australian short-term money market [STMM] consists of a set of inter-related sub-markets which are designed to utilize funds deposited with them at call or for very short periods. The sub-markets include the official STMM, the unofficial STMM, the gilt-edged market and the inter­ company market. A study of the background and early history of the STMM reveals the considerable influence exerted by various monetary authorities on the structuring of all markets, particularly in regard to the establishment of the official STMM in February 1959. The development of the STMM was greatly affected by this event and the growth and performance of each sub-market up to the end of the present study in December 1976 has to be examined in the light of this and other areas of official intervention By the mid 1970 s the growth of money market corporations had clearly outstripped that of the authorised dealers and these money market corporatio now collectively exert the greatest amount of influence of any of the short term money markets on economic activity. However these corporations fall outside the ambit of many of the present controls exercised by the monetary authorities - with direct implications for future policy. A study of the operational aspects of the STMM reveals the extreme variation in market rates and levels of deposits not only during the year but also on a day-to-day basis. Two econometric studies of the official STMM were carried out, one of daily movements in supply and demand for funds and the other a quarterly series of supply equations disaggregated in to types of client . These support the hypothesis that the trading banks use the official STMM as a lender of last resort while other clients utilize it more as a repository of liquid funds. There was also a large proportion of the variation in both supply and demand of funds in the official STMM which remained unexplained by the variables used in these regressions. Three case studies were carried out in order to analyse the role of the STMM in various periods of financial strain. These studies covered

the November 1960 credit squeeze, the collapse of Mineral Securities Australia Limited in 1971 and the financial crisis of 1974. Together they reveal a growing maturity within the STMM and with the exception of the inter-company market, a positive contribution by the STMM in each crisis through its function as a buffer zone for other markets. The outcome of these theoretical and empirical studies is a series of recommendations which emphasize the need for greater reliance in market forces rather than further direct controls. These recommendations include revising and extending the provision of last resort loans by the Reserve Bank to some of the existing money market corporations, and the alteration of the present system of "tap" issues of Treasury notes to a system of tenders. Show more