تحقیقات مالی اسلامی (پیوسته) (Oct 2015)
Open Market Operation with Government Securities and Central Bank
Abstract
This paper tries to evaluate the nature of open market operation in the conventional banking system and to compare the usage of government securities and central bank securities for conducting this operation. In addition, the experience of the Iranian central bank in using central bank Musharakah certificates is reviewed. The main results of the paper, derived from an analytical- descriptive approach, show that: firstly, in the conventional banking system, only special types of securities can be used for open market operation. These securities should satisfy characteristics like minimum risk, short-term duration, fixed and pre-determined interest rate and finally the ability for expanding or destroying monetary base. Secondly, in developed countries, where there is a structured secondary market for government securities, central banks usually enter this market and conduct open market operations. However, in developing countries, where there is no structured secondary market for government securities, the central banks are obliged to issue their own certificates to conduct monetary policies. Thirdly, both of the ways for conducting open market operation (including government securities and central bank securities) have pros and cons. Nevertheless, if the secondary market conditions for government securities were satisfactory to fulfill the central bank needs for policy-making, there would be no rationale for the central bank to issue its own securities. Finally, the Musharakah certificates, which are the only instrument used by the Iranian central bank for open market operations, are not compatible with the nature of the latter. In fact, the Musharakah contract is essentially risky because first, its term is not a short one, second, it is unable to determine the exact profit rate at the beginning of the contract and finally, the central bank cannot block the gathered resources. Considering these limitations, it is necessary for the Iranian central bank to substitute the Musharakah certificates with other kinds of Islamic Sukuk.
