The Payments Systems Reforms and Monetary Policy in Emerging Market Economies in Central and Eastern Europe

IMF Working Papers, January 1, 1994

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The paper discusses the interrelationships between payments system reform and monetary policy implementation in selected countries in Central and Eastern Europe.
Reforms in the payments system are viewed as closely interrelated with the development of money and foreign exchange markets and the instruments of monetary policy used by the central banks.
Large and variable float balances created special challenges.
While departing from very similar origins, there were significant variations in experiences of the countries studied in transforming their payments systems after the start of the reforms towards a market economy, from which certain lessons can be drawn.

Payments system reform and monetary policy implementation are interdependent and evolve together with money and foreign exchange market development.
Large and variable payments float materially affected monetary management and policy implementation.
Countries studied began from similar starting points but exhibited significant variation in the pace, sequence, and outcomes of payments system transformation.
Analysis implies that different country experiences yield lessons applicable to monetary policy design and payments system reform sequencing.

Design of monetary policy instruments should account for the state and reform trajectory of the payments system.
Management of payments float is critical to effective monetary control; addressing large and variable float balances is a priority for central banks.
Coordinated development of money markets, foreign exchange markets, and payments infrastructure supports more effective monetary policy implementation.
Tailoring reform approaches to country-specific starting conditions and institutional capacities is important given observed cross-country variation.

Subjects: Banking, Commercial banks, Credit, Currency markets, Financial institutions, Financial markets, Fiscal accounting and reporting, Money, Money markets, Payment systems
Keywords: bank reserves, Central and Eastern Europe, Commercial banks, Credit, Currency markets, demand order, monetary management, monetary policy, Money markets, noncash payment, payment clearing, payment order, Payment systems, payment transaction, payments agreement, payments float, payments instruction, payments system arrangement, processing payment, WP