Auctioning Discounts

The objective of this note is to propose an improvement in the method of controlling the monetary base in Brazil.^ We call the proposal "auctioning discounts" and argue that auctioning is a flexible instrument to control the amount of monetary base supplied by discounts. Improved control of discounts enables the central bank to remain closer to the targets in the monetary budget. An added benefit is that the discount rate adjusts to the open market rate on LTN's. This assures that gains from money creation, "seignorage," accrue to the monetary authorities and not to the commercial banks, avoiding undesirable pressures to increase the monetary base. It also permits the maturities of the discounts to adjust to the needs of the market.