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Monetary Policy Independence and the Strength of the Global Financial Cycle

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  • Jonathan Witmer

Abstract

24/7 payment settlement may impact the demand for central bank reserves and thus could have an effect on monetary policy implementation. Using the standard workhorse model of monetary policy implementation (Poole, 1968), we show that 24/7 payment settlement induces a precautionary demand for central bank balances. Absent any changes or response by the central bank, this will put upward pressure on the overnight interest rate in a standard corridor system of monetary policy implementation. A floor system is much less sensitive to this change, as long as excess balances are large enough.

Suggested Citation

  • Jonathan Witmer, 2020. "Monetary Policy Independence and the Strength of the Global Financial Cycle," Staff Working Papers 20-26, Bank of Canada.
    • Handle: RePEc:bca:bocawp:20-26
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    References listed on IDEAS

    as
    1. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    2. Antoine Martin & James J. McAndrews & Ali Palida & David R. Skeie, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York.
    3. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    4. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    5. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
    6. Garth Baughman & Francesca Carapella, 2020. "Voluntary Reserve Targets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 583-612, March.
    7. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    8. Michael Tompkins & Ariel Olivares, 2016. "Clearing and Settlement Systems from Around the World: A Qualitative Analysis," Discussion Papers 16-14, Bank of Canada.
    9. Bech, Morten & Keister, Todd, 2017. "Liquidity regulation and the implementation of monetary policy," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 64-77.
    10. Norman, Ben & Shaw, Rachel & Speight, George, 2011. "The history of interbank settlement arrangements: exploring central banks’ role in the payment system," Bank of England working papers 412, Bank of England.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary policy implementation; Payment clearing and settlement systems;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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