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The operational target of monetary policy and the rise and fall of reserve position doctrine

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  • Bindseil, Ulrich
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    Abstract

    Before 1914, there was little doubt that central bank policy meant first of all control of short term interest rates. This changed dramatically in the early 1920s with the birth of “reserve position doctrine” (RPD) in the US, according to which a central bank should, via open market operation, steer some reserve concept, which would impact via the money multiplier on monetary aggregates and ultimate goals. While the Fed returned to an unambiguous steering of short term interest rates only in the 1990s, for example the Bank of England never adopted RPD. This paper explains the astonishing rise and fall of RPD. The endurance of RPD is explained by a symbiosis of central bankers who may have partially sympathised with RPD since it masked their responsibility for short term interest rates, and academics who were too eager to simplify away some key features of money markets and central bank operations. JEL Classification: E43, E52, B22

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0372.

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    Date of creation: Jun 2004
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    Handle: RePEc:ecb:ecbwps:20040372

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    Keywords: instruments’ choice problem; monetary policy implementation; monetary policy instruments; operational target of monetary policy;

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    1. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-53, May.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    3. Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Banco de Espa�a Working Papers 0016, Banco de Espa�a.
    4. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
    5. Axilrod, Stephen H & Lindsey, David E, 1981. "Federal Reserve System Implementation of Monetary Policy: Analytical Foundations of the New Approach," American Economic Review, American Economic Association, vol. 71(2), pages 246-52, May.
    6. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
    7. Juan Ayuso & Andrew Haldane & Fernando Restoy, 1997. "Volatility transmission along the money market yield curve," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 56-75, March.
    8. Bindseil, Ulrich & Camba-Méndez, Gonzalo & Hirsch, Astrid & Weller, Benedict, 2004. "Excess reserves and implementation of monetary policy of the ECB," Working Paper Series 0361, European Central Bank.
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    Cited by:
    1. Bernard Laurens & Rodolfo Maino, 2007. "China," IMF Working Papers 07/14, International Monetary Fund.
    2. Chmielewski, Tomasz, 2005. "Bank risks, risk preferences and lending," MPRA Paper 5131, University Library of Munich, Germany, revised 15 Jan 2006.
    3. Rubina Hassan, 2011. "The Reserve Equation and the Analytics of Pakistan’s Monetary Policy," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 111-142, Jan-Jun.
    4. Karel BRŮNA, 2010. "Monetary Policy Implementation and Liquidity Management of the Czech Banking System," European Financial and Accounting Journal, University of Economics, Prague, vol. 2010(3), pages 15-41.

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