Monetary policy: NL - DNB

DNB monetary policy instruments and operating targets

Operating procedure

Since the mid-1970s the framework of money market operations was largely determined by the existence of persistent money market shortages. From September 1973 DNB provided the banking system with a quota-regulated access (contingentsregeling) to its discount window and (secured) advances on the banks' current accounts with DNB. The quotas were established for periods of 3 months and they determined a maximum average use over the 3 month period. Initially, market interest rates were influenced by imposing variable surcharges on so-called zones of excessive use of the discount window and advances.

Since 1979 money market interest rates were influenced by the rates on increasingly frequent open market operations, in particular the regular tenders (variable rate) and subscriptions (fixed rate) for special loans (speciale beleningen: quasi-repo contracts), and occasionally dollar swaps. Details of the special loan operations would normally be announced (approx 16:00) the day before the tender/subscription, which would then be held early-morning next day. Special loan contracts had varying maturities over time (1 month or less), and also depended on money market and exchange rate circumstances. During the late-1980s mostly short maturities of 1-7 days were used (average 3 day) and continuously rolled over, i.e. expiring contracts being replaced by new contracts. From the early-1980s only fixed rate subscriptions were used, with volume determined by DNB (% of volume bids).

1989 capital market intervention

In March 1989 DNB first used its portfolio of long government bonds, specifically accumulated for capital market intervention since October 1987. The aim was to provide an alternative investment for banks, reducing the growth of domestic net money creation and avoiding a possible outflow of capital with risks of exchange rate pressure. However, DNB quickly decided on a new system of credit control [monetary cash reserve] and the bond portfolio remained useless. DNB sold the portfolio during 1992-93.

Operating targets

DNB monetary policy strategy

DNB monetary policy has largely been determined by the requirement to maintain a fixed exchange rate. The dollar exchange rate was the intermediate target until the final collapse of the Bretton Woods system in March 1973. Subsequently, the Netherlands participated in the European currency 'snake' arrangement (March 1973-1979) and entered the Exchange Rate Mechanism of the European Monetary System in March 1979, effectively fixing the exchange rate against the D-mark. From January 1999 the Netherlands participates in the euro.

Since 1983 almost all interest rate decisions followed corresponding changes in German interest rates (frequently after consultation between the two central banks).

Several times, Dutch monetary authorities have attempted to address monetary problems (for example, excessive money growth) in ways that tried to avoid the constraints imposed on money market interest rates by the fixed exchange rate regime. In fact, they formally defined two distinguished areas of monetary policy, suggesting they could be treated separately. Narrow monetary policy (interest rate and exchange rate) and broad monetary policy (money and credit growth). Broad monetary policy amounted to various systems of quantitative restrictions on money and credit growth (see Hilbers (1998) for a description and review).

* postwar until end-1950 qualitative credit controls.

A system whereby DNB permission was to be obtained for all credits in excess of fl. 50,000.

* 1950s and 1960s.

quantitative credit restrictions:

1. 1951 until end-Mar1952 [excess lending penalised by the requirement to borrow from DNB, irrespective of the bank's actual liquidity position]

2. 02Sep1957 - 19Mar1958 [excess lending to the domestic private sector penalised by a surcharge of 1 percent on central bank discount window borrowing]

3. 01Jan1961 - 01Jan1963 [excess short-term lending to domestic private sector penalised by requirement to hold interest-free deposits with DNB]

4. 01Oct1963 - 10Jun1967 [as 3.; in 1965 extended to long-term lending]

5. 01Jan1969 - 01Mar1972 [as 4.; , in 1969-1970 extended from commercial banks to savings banks and giro institutions]

cash reserve requirement:

Mar1954 - Aug1963 [from Sep1963 the cash reserve requirement was set to zero]

* early 1970s indirect monetary control using liquidity reserve requirement.

19Jul1973 - 1979 [requirement to hold liquid assets with DNB depending on short- and long-term liabilities on the banks' balance sheet]

* late 1970s and 1980s return to quantitative credit controls.

1977-1981 net credit restriction

May1977 - Jul1981 [gross lending minus long-term liabilities, excess lending penalised by requirement to hold interest-free deposits with DNB]

1986-1987 so-called gentlemen's agreement

[voluntary restriction on growth of net lending by banks ('beperkte dijkbewaking')].

1989-1990 monetary cash reserve

01 Jul1989 - Apr1990 [excess growth of net lending (referred to as net money creation, NMC) penalised with maintenance of interest-free deposit with DNB; effectively the penalty was converted into payment of a corresponding fine. From April 1990 the reserve ratio remained at zero until the arrangement expired.]

* 1990s abandonment of money and credit controls, focus on exchange rate target

The systems of direct controls on money and credit growth largely failed to have the desired results and were frequently circumvented by market participants, as has been the common experience in other countries as well. In its 1991 Annual Report DNB finally accepted that the preconditions for controlling domestic money and credit supply did not exist. The fixed exchange rate, in particular with respect to the DMark became its sole objective.

De Nederlandsche Bank: Legislation, decision-making, transparency

De Nederlandsche Bank (DNB) was established in 1814 and given a de facto monopoly on the issue of bank notes. (De facto because it alone was freed from stamp duty.) The bank was intended to provide a more efficient payments system and an expansion of commercial credit to boost economic activity. The Bank Act 1948 transferred ownership of DNB to the Dutch State and described it tasks. It stated "that it shall be the duty of the Bank to regulate the value of the Netherlands currency in such a way as will be most conducive to national welfare, and in so doing, seek to stabilize this value as much as possible". The same article provided that "the Bank shall provide for the monetary circulation in the Netherlands, as far as this circulation consists of bank notes," and "that the Bank shall exercise supervision over the credit system according to the provisions in the Act on the Supervision of the Credit System". The Bank Act 1998 described how DNB would fit in the European System of Central Banks and its relationship with the ECB.

The policy-making body of the Dutch central bank was the Governing Board. The DNB Governing Board met regularly to discuss interest rate policy, with meetings arranged depending on market circumstances. Interest rate decisions would be announced immediately. Rates on special loans (open market operations) were adjusted very frequently and often in small steps, with rate decisions being announced for every new special loan tender (variable rate)/subscription (fixed rate). The somewhat irrelevant official rate on secured advances (as well as the discount rate) was adjusted much less frequently.

HISTORICAL DATA, TABLES, SUPPLEMENTARY INFORMATION

Table DNB Presidents

Table Intermediate targets Netherlands

Note: Dutch money/liquidity definition

From 1951 Dutch monetary analysis has preferred a broad liquidity concept. Broad money included 'all liquid liabilities of money creating institutions and the government" "to the extent that these are convertible into money, at a large scale, at short notice, without substantial costs and without significant loss of market value". This broad definition included short liabilities of the central government and the local authorities (i.e. Treasury paper, short term deposits and current acccount deposits). Maturity criterion was 2 years original maturity. Furthermore, a part of savings accounts ('liquid savings') was attributed to broad money; until 1964 savings deposits with commercial banks; from 1964 'liquid savings' based on observed 'velocity' (i.e. turnover, amount of savings withdrawal); as of January 1991 savings deposits were eliminated from the M2 money concept and moved to a new M3 money concept.

In the redefinition of late-1992 short-term government and local authority liabilities lost their status as monetary liquidity. [In fact, moved to M4, a concept not used by DNB.] Money M3H was redefined to include short-term savings deposits, with maturity up to 2 year.

Of course, over time many other definition changes and reclassifications occurred. Major changes occurred in the treatment of various financial institutions [commercial banks, giro institutions, savings banks, and specific public sector banks].

De Nederlandsche Bank DNB Homepage

Central Bank

Monetary policy tactics

• Den Dunnen, Instruments of money market and foreign exchange market policy in the Netherlands, DNB Monetary Monographs nr.3 1985.

Monetary policy strategy

• De Greef, Hilbers and Hoogduin, Moderate monetarism: A brief survey of Dutch monetary policy in the post-war period, DNB Staff Report nr.28, 1998
• Hilbers, Financial Sector Reform and Monetary Policy in the Netherlands, IMF Working Paper 98/19, 1998.

Unfortunately, most of the literature on Dutch monetary policy and DNB policy instruments is available only in Dutch. Also, given the strong and persistent focus on a fixed exchange rate (particularly from1983 onwards) general discussions on monetary policy are scarce and mostly dated before the mid-1980s.