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Monetary policy operational frameworks - a new taxonomy

Author

Listed:
  • Paolo Cavallino
  • Mathias Drehmann
  • Richard Finlay
  • Julie Remache

Abstract

Central banks' operational frameworks are at the heart of monetary policy implementation. Yet the conventional classification falls short of capturing their wider implications for banks' incentives and market outcomes. We propose a new taxonomy based on two key dimensions. First is the marginal opportunity cost of holding reserves, which influences banks' incentives to trade reserves in the money market. Second is the quantity of reserves, which affects how banks manage liquidity risks and comply with regulatory and supervisory requirements. The continuous nature of these dimensions allows for a granular classification of operational frameworks. Applying the taxonomy to real-world operational frameworks uncovers unexpected similarities between distinct frameworks and highlights how similar designs can lead to differing outcomes.

Suggested Citation

  • Paolo Cavallino & Mathias Drehmann & Richard Finlay & Julie Remache, 2025. "Monetary policy operational frameworks - a new taxonomy," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:2509d
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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