Munich Personal RePEc Archive

The use of Unconventional Monetary Policy Instruments by South Asian Central Banks

Arby, Muhammad Farooq and Younus, Sayera and Tobgye, Sonam and Dema, Phurpa and Das, Praggya and Shafwath, Aminath and Bhatta, Siddha Raj and Raza, Bilal and Perera, W.S Navin (2021): The use of Unconventional Monetary Policy Instruments by South Asian Central Banks. Published in: SAARCFINANCE Working Papers , Vol. na, No. 2023 (1 April 2023): pp. 1-44.

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This SAARCFINANCE collaborative study explores the state of central banks’ unconventional monetary policy measures in the SAARC region. Following are the key highlights of the study:

In SAARC region, main unconventional tool has been refinance schemes, a kind of quantitative easing, which targets underdeveloped sectors such as cottage, small and medium size sectors, agriculture, and poverty alleviations and exports.

Recently, central banks of the region (such as SBP and RBI) has introduced some unconventional monetary policy tools, including forward guidance and long-term open market operations in order to deal with the situations arising from COVID-19 pandemic.

Currently, most of the quantitative measures through refinance schemes in the region are introduced due to economic crisis of COVID-19, and are expected to end after specified time.

However, SBP’s schemes of Export Refinance Scheme (EFS) and Long Term Financing Facility (LTFF) were introduced in past, before COVID-19 and these have no termination date yet. In the case of Nepal, the refinance scheme introduced during the COVID-19 pandemic may continue after the pandemic (i.e., when the situation normalizes); however, their terms and conditions may change. For instance, currently, the Nepal Rastra Bank (NRB) can provide refinance amount of five times the available fund through monetary expansion (printing new notes). This provision is likely to be discontinued soon, but the refinance facilities will continue. Thus in a sense, NRB has redefined the refinance schemes to respond to the crisis.

The refinance schemes are usually the central banks’ own initiatives; and interest rates charged on users are generally lower than the market rates.

There are a few impact evaluation studies, which reveal that refinance schemes generally improve the economic performance of targeted groups/sectors.

There is hardly any study on implications of these schemes for exchange rate, interest rate, and inflation. However, as the overall size of the refinance operations is very small, they do not seem a threat to the macroeconomic stability of the region.

Scarcity of data is a major limitation in assessing the effectiveness as well as macroeconomic consequences of unconventional policy measures including refinance schemes. This study recommends the creation of a database for all refinance schemes and other unconventional policy measures in the SAARC region to encourage future research in this area.

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