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Monetary policy implementation frameworks: a comparative analysis

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  • Antoine Martin
  • Cyril Monnet

Abstract

The authors compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, while the second framework relies only on open market operations. They show that the Friedman rule cannot be implemented when the central bank uses standing facilities, while it can be implemented with open market operations. For a given rate of inflation, the authors show that standing facilities unambiguously achieve higher welfare than just conducting open market operations. They conclude that elements of both frameworks should be combined. Also, their results suggest that any monetary policy implementation framework should remunerate both required and excess reserves.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-27.

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Date of creation: 2009
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Handle: RePEc:fip:fedpwp:09-27

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Keywords: Monetary policy ; Open market operations ; Banks and banking; Central;

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  1. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  2. Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 29-44.
  3. Marvin Goodfriend, 2002. "Interest on reserves and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 77-84.
  4. Shouyong Shi, 2005. "Nominal Bonds And Interest Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 579-612, 05.
  5. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  6. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2006. "A Dynamic Model of Settlement," Working Papers 1053, Queen's University, Department of Economics.
  7. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
  8. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "The Distribution of Money and Prices in an Equilibrium with Lotteries," IEW - Working Papers 174, Institute for Empirical Research in Economics - University of Zurich.
  9. Michael Woodford, 2000. "Monetary Policy in a World Without Money," NBER Working Papers 7853, National Bureau of Economic Research, Inc.
  10. Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-69, November.
  11. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
  12. Edward J. Green & Ruilin Zhou, 2002. "Money as a mechanism in a Bewley economy," Working Paper Series WP-02-15, Federal Reserve Bank of Chicago.
  13. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
  14. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
  15. Whitesell, William, 2006. "Interest rate corridors and reserves," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1177-1195, September.
  16. William Whitesell, 2006. "Monetary policy implementation without averaging or rate corridors," Finance and Economics Discussion Series 2006-22, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2013. "Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic," ECON - Working Papers 121, Department of Economics - University of Zurich, revised Sep 2013.
  2. Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2010. "Channel systems: why is there a positive spread?," IEW - Working Papers 517, Institute for Empirical Research in Economics - University of Zurich.
  3. James Chapman & Jonathan Chiu & Miguel Molico, 2011. "Central bank haircut policy," Annals of Finance, Springer, vol. 7(3), pages 319-348, August.
  4. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 426-438.
  5. Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Alessandro Marchesiani & Aleksander Berentsen, 2010. "Standing Facilities Versus Open Market Operations: Equivalence Results," 2010 Meeting Papers 929, Society for Economic Dynamics.

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