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Channel systems: why is there a positive spread?

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  • Aleksander Berentsen
  • Alessandro Marchesiani
  • Christopher J. Waller

Abstract

An increasing number of central banks implement monetary policy via two standing facilities: a lending facility and a deposit facility. In this paper we show that it is socially optimal to implement a non-zero interest rate spread. We prove this result in a dynamic general equilibrium model where market participants have heterogeneous liquidity needs and where the central bank requires government bonds as collateral. We also calibrate the model and discuss the behavior of the money market rate and the volumes traded at the ECB’s deposit and lending facilities in response to the recent financial crisis.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 517.

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Date of creation: Nov 2010
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Handle: RePEc:zur:iewwpx:517

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Keywords: Monetary policy; open market operations; standing facilities;

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  1. Vasco Cúrdia & Michael Woodford, 2010. "The central-bank balance sheet as an instrument of monetary policy," Staff Reports 463, Federal Reserve Bank of New York.
  2. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  3. Lagos, Ricardo, 2010. "Some results on the optimality and implementation of the Friedman rule in the Search Theory of Money," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1508-1524, July.
  4. Ricardo Lagos, 2010. "Asset prices, liquidity, and monetary policy in the search theory of money," Quarterly Review, Federal Reserve Bank of Minneapolis, issue July, pages 14-20.
  5. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. Ricardo Lagos & Guillaume Rocheteau, 2006. "Money and capital as competing media of exchange," Working Paper 0608, Federal Reserve Bank of Cleveland.
  8. Aleksander Berentsen & Cyril Monnet, 2008. "Monetary policy in a channel system," Working Papers 08-7, Federal Reserve Bank of Philadelphia.
  9. David Andolfatto, 2008. "Essential Interest-Bearing Money," EIEF Working Papers Series 0802, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
  10. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2011. "Information and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 355-377, October.
  11. Antoine Martin & Cyril Monnet, 2008. "Monetary policy implementation frameworks: a comparative analysis," Staff Reports 313, Federal Reserve Bank of New York.
  12. Shi, Shouyong, 2008. "Efficiency improvement from restricting the liquidity of nominal bonds," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1025-1037, September.
  13. Aleksander Berentsen & Christopher Waller, 2008. "Outside Versus Inside Bonds," IEW - Working Papers 372, Institute for Empirical Research in Economics - University of Zurich.
  14. Araujo, Luis, 2004. "Social norms and money," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 241-256, March.
  15. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
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