Interest Rate Policy in Practice: A Review with some Implications for the Irish Banking System in the EMS

With increasing monetary integration in Europe, Ireland's Banking system has become increasingly influenced by monetary policy actions in other EMS countries. The purpose of this paper is to review the mechanisms adopted by the Bundesbank and various other central banks in influencing interest rates. We explain why the toolbox used by central banks is so complex and highlight a number of current issues, such as the role of reserve requirements and the discount rate, and central bank secrecy about policy. We conclude by noting a couple issues which could become increasingly important for the Irish banking sector especially in the context of an EC-wide implementation of monetary policy under EMU, namely, the high dependence on floating rate banking assets and liabilities, and a potential lack of access for the Irish institutions to the core money market of the EMU.