William Davidson Institute Working Paper 402
bank. It ensues the multiplication of the monetary base, with an increase in deposits
and the money supply in the economy. If this increase in the money stock translates
itself in higher prices, in real terms the depreciation rate can be smaller than the
nominal depreciation and may even turn into real appreciation. A country that runs a
large current account deficit may wish to prevent this outcome. In this case, the
central bank must block the increase in monetary base. It thus have to simultaneously
carry out a sterilization operation, where it offsets the initial increase in reserves of
foreign exchange (or net foreign assets) by a reduction in other counterpart of the
monetary base. Let us examine a (very) simplified balance sheet of a “standard”
central bank, like the Fed or the ECB:
Balance sheet of a “standard” central bank
|
Assets_________ |
Liabilities_______ | |
|
RFX |
+1 |
N________ |
|
REF |
R +1 | |
|
(a)______ |
-1 |
_________-1 |
|
TB | ||
|
(b)_____ |
(-1) | |
On the asset side, we have RFX, the reserves of foreign exchange, REF for
ordinary banks refinancing (or credit to the banking sector) and Treasury bonds held
by the Central bank. On the liability side, we have N, the bank notes in circulation and
the reserves R, i.e deposits of the ordinary banks with the central bank.
If the Central bank buys dollars in amount of 1 local currency unit, reserves
and assets increase. To counter the increase in reserves, two methods are usually
utilized: (a) the bank may simultaneously sell Treasury bonds (this is the Fed
privileged way) in the same amount, or (b) it may reduce the credit to the banking
sector (REF) (this is the ECB preferred way). Both operations will lead to a unit
reduction in the reserves (R).
But let us turn back to the contemporary situation of the NBR. As we know,
after the summer 1999 crisis, the NBR augmented dollar assets in a rapid and
accelerated way. In order to prevent the increase in the monetary base, it was bound to
sterilise this intervention.
Could the NBR have used the above-mentioned usual tools? Obviously, it
could not have reduced refinancing, insofar Romanian refinancing of the banking
sector is quite small, and is mostly related to non-monetary operations, where some
banks received special credits to help them restructuring. It neither could sell
massively Treasury bonds, first of all because the stock of Treasury bonds is quite
small compared to foreign exchange reserves, and because there was quite little
appetite for these bonds.
So the NBR used another method, where the NBR borrows resources from the
ordinary banks. This operation is called “deposit-taking”, or attracting deposits, and
can be seen as the reverse of a refinancing operation. So far, the average duration of
these operations were of one month, but the tendency is to lengthen them. In this case,
the simplified balance sheet of an ordinary bank looks as:
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