Central Banks, Commercial Banks and Repurchase Agreements

Abstract

The management of the monetary base and of the velocity of circulation of money is a major function of central banks (see D.N. Chorafas, The Money Magnet Regulating International Finance and Analyzing Money Flows, Euro-money Books, London, 1997), sometimes assisted through repurchase agreements (repos). An example of the use of repos for monetary policy reasons is provided by the Bundesbank and the ECB whose main monetary instrument is repurchase rate. The ECB asks the national central banks to conduct open-market operations to keep interest rates within its desired range, with:

• the ceiling being the rate which banks can borrow overnight from the central bank; and

• the floor being the rate at which banks with surplus cash deposit overnight funds.