THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 477

CHAPTER 17

Tools of Monetary Policy

445

Hence, reverse repos, also known as Sale and Repurchase Agreements
(SRAs), alleviate undesired downward pressure on the overnight financing rate.
Because the effects on settlement balances of SPRAs and SRAs are reversed on
the day the agreement matures, SPRAs and SRAs are actually temporary open market operations. Moreover, as you will see in the next section, because the effects
on settlement balances of SPRAs and SRAs are typically neutralized by the end of
the day by the Bank of Canada, there is no change at the end of the day in the
level of settlement balances in the system.

Advantages of
SPRAs and
SRAs

The Bank of Canada s repurchase transactions, either special PRAs or SRAs, have
several advantages over other tools of monetary policy. They occur at the initiative of the Bank of Canada, which has complete control over their volume, and
are easily reversed. Moreover, the Bank of Canada can enter into multiple rounds
of open-market-buyback operations and can also conduct these operations outside of the regular timeframe.
However, open-market-buyback operations tend to be infrequent and small,
because the channel/corridor system for setting the overnight interest rate requires
a minimal amount of such operations. As can be seen in Figure 17-7, which shows
special PRAs and SRAs over the 1999 to 2008 period, the Bank of Canada conducted repurchase transactions on about 70 days per year (on average) over this
period.

SETT LE ME NT BAL ANC ES MA NAG EM EN T
In addition to targeting the overnight interest rate at the mid-point of the operating band, the Bank of Canada also targets the level of settlement balances in the
system. Typically, the target level of settlement balances is announced the previous day. Initially, the Bank targeted a daily level of settlement balances of zero or

greater (usually $25 million), but recently, because of pressures on the overnight
rate, the Bank made several adjustments to the target level of settlement balances
2500

Special PRAs
SRAs

2000
1500
1000
500
0
500
1000
1500

F I G U R E 17- 7

Special PRA and SRA Operations

Source: Bank of Canada website, www.bankofcanada.ca.

8/4/2008

2/4/2007
8/4/2007
2/4/2008

8/4/2006

2/4/2006

2/4/2005
8/4/2005

8/4/2003
2/4/2004
8/4/2004

8/4/2002
2/4/2003

8/4/2001
2/4/2002

8/4/2000
2/4/2001

2/4/2000

8/4/1999

2/4/1999

2000