The effectiveness of traditional instruments of monetary policy during the foreign exchange auction system in Zambia

In a liberalised economy the monetary authority traditionally relies on four instruments with which to control money supply, namely, open market operations, legal minimum reserve requirement changes, discount rat© policy and moral suasion. In this study the effectiveness of
traditional instruments of monetary policy during the foreign exchange auction system in Zambia was examined. The policy instruments were each in turn scrutinized under the following headings = (a) theoretical underpinnings;(b)
limitations and;(c) performance during the auction period
from which policy directions and conclusions were drawn.
Open market operations" effectiveness to restrain money supply was severely compromised largely due to government's
desire to maintain the huge budget deficit in real terms in the face of the fast depreciating local currency on the
weekly auction. The variable minimum reserve requirements was drastically effective and efficient in its own right,
but its impact was small due to the piecemeal nature of reserve ratio adjustments. The discount rate policy proved
illusive as the economy displayed a semblance of the Gibson's Paradox - the parallel movement of the price level
with interest rates. Finally, the potency of moral suasion was greatly curtailed by incongruous intra-national and
international politics of the day coupled with the lackadaisical attitude of the monetary authority