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Originally Posted by Tietäjä
Erm. You actually destroy and print money to work out the interest rate? What's the point? That sounds awfully medieval. Does this mean, if you destroy money, there will be less money on supply hence the banks will bid higher, and vice versa? If so, why actual destruction or print of money would be required is beyond me (the CB could just store the cash, or if they'd want less cash on the market, they could just increase the amount of cash banks need to store, well, the cash reserve ratios, and vice versa. Actually printing and destroying money as means of monetary policy sounds very medieval to me).
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The huge proportion of money doesnt actually exist, as such "printing" and "destroying" money is merely an alteration in a database somewhere. The Reserve Bank doesnt go around knocking on people's doors and takes money and melts it down - obviously.
It'd be too much fun
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But storing the money wouldnt work; it would still "exist" in the financial system, and thus the expecations that it would be used, and thus doing nothing to alter the cash rate. I suppose, however, the Reserve Bank may choose to remove the currency from domestic circulation by exchanging it for foreign reserves or through bonds, but regardless its effectively meaningless how it is done theoretically; the important (practical) consideration is that the central bank declares what the cash rate is, and all financial institutions take this as a given, and then act in the economy.
I would imagine that for all practical purposes, the Reserve Bank of Australia is effetively the same as the European Central Bank, the Bank of England, the US Federal Reserve et al. Mainly because they are expected to do the more or less same things in the more or less same way in the same financial system, so fundamentally they are the same thing.