ABSTRACT
Most of the developing countries have been observed, in recent years, to take a variety of policy measures to promote and broaden the market for government bonds, primarily as a means to mobilise savings but also as the basis for using the government bonds for open market operations as an instrument to control the money supply. The general experience, however, had been that policies directed toward the development of bond markets often tended to, more often inadvertently but in some cases intentionally, interfere with the evolution of open market policy. Nowhere has this been more dramatised than in the case of Taiwan. Many of the measures designed both by the monetary authorities as well as the Government, in fact, knocked out the very conditions that would have made for successful open market operations. For one thing, it was made mandatory that transactions in government bonds were at par, in so far as the non-bank public was concerned. For another, though theoretically bond prices were variable in regard to the transactions with banks, their effect was neutralised by their asset management policies, necessitated partly by the institutional factors and partly owing to basic limitations on the government bond as a profitable alternative asset for banks. As a result, the monetary authorities could neither influence the structure of interest rates nor the credit granting capacity of banks. There are, however, enough pointers, due to the recent developments in policies, that the situation may change in the near future.
