lend to governments, either by legislation or written agreements with their government. particularly strong prohibitions exist in brazil, chile, peru and poland, where lending to the government is precluded by the constitution. in other countries a limit may be specified in law. in trinidad and see chapter 3, “ external adjustments to terms of trade shifts ” in regional economic outlook, international monetary fund western hemisphere department, april 2017. among the vast literature on the subject see for example hilbers, paul, “ interaction of monetary and fiscal policies : why central bankers worry about government budgets ”, presented at an imf seminar on current developments in monetary and financial law, washington, d. c., may 24 - june 4, 2004 tobago, the legal limit is 15 per cent of projected government revenue, with a stipulation that the borrowing be repaid “ as soon as possible. ” 13. finally, in terms of timing, it is better for macroeconomic adjustments to be made from a position of strength. determining the pace of adjustment to a large terms of trade shock as trinidad and tobago is facing is not a simple choice between shock therapy and gradualism. key considerations include assessments of whether the shock is temporary or permanent, what is the menu of appropriate policies, how financial markets and the public would react, and what is the room available for maneuver. focusing on the latter, it is evident that, unlike some earlier periods of energy price declines, trinidad and tobago entered this latest episode a few years ago with substantial buffers : these included high international reserves by any standard, substantial deposits in a sovereign wealth fund ( heritage and stabilization fund ) and meaningful fiscal space due to a relatively low level of debt. these cushions have allowed the adjustment to proceed at a somewhat measured pace. of course, it also means that the degrees of freedom would become progressively smaller over time and this would likely affect the perspective of financial markets. taking everything into account, compared to many other energy exporters, trinidad and tobago is still in a relatively strong position, but attention must be taken to engender the necessary reforms in a context of fiscal, structural and monetary policy coordination as early as possible. 14. looking forward, monetary policy in trinidad and tobago will need to maintain its dynamism to deal with current as well as future domestic and external financial challenges. in summary, the central bank of trinidad and tobago joins the fraternity of central banks across the world in pursuing a monetary policy appropriate to country - specific circumstances, while

management in trinidad and tobago : a chronology, 1964 - 2004, central bank of trinidad and tobago, 2004 for a review of the evolution of the monetary policy instruments. “ repo rate ”, which broadly represents the interest charge on banks needing to borrow from the central bank ; movements in the repo rate would not only affect the potential cost of funds for the banks but would serve as a wider signal on the central bank ’ s intentions for the path of interest rates in the economy. 6. but this requires constant adaptation to market behaviors, and could over time be even more complicated with the advent of digital currencies. the use of indirect instruments has considerable merit by allowing market forces to operate ; in this way a small change in interest rates for example could ripple through the financial system, with institutions reacting based on their particular circumstances and needs. in contrast, the blunt direct tools would largely be unable to discriminate among financial institutions, notwithstanding their differing situations. indirect paths however do require a deep understanding of how the central bank ’ s tools would work their way through the financial system — in economic parlance, the ‘ transmission mechanism ’ of monetary policy. this world is inhabited by moving parts such as behavioral functions, reaction functions, anticipations and expectations that are not always stable and that often operate with varying lags. to take a practical example, the central bank may wish to raise interest rates in the economy by selling securities ( open market operations ) ; the idea is that as financial institutions invest in these securities this would push up interest rates. alternatively, the bank may opt to increase the repo rate on the expectation that other interest rates would rise as the cost of potential commercial bank funding from the central bank goes up. but in both circumstances, if financial institutions have a lot of excess funds on their hands, then interest rates may not rise at all! the point is that the central bank has to be consistently monitoring the markets and gauging reactions for indirect instruments to be successful. at times, moral suasion has to be employed — telling financial institutions how they are expected to behave — to reinforce the signaling effect of an action. looking ahead, with digital currencies likely on the near horizon, the very definitions and measurement of money and credit are up for grabs and could further complicate how monetary policies operate. 7. trinidad and tobago currently remains in what may still be the early stages of adjustment to a potentially permanent shift in the terms of trade. the declines in the